MBIA´s Fairytale Continues.....

And they still have an AAA rating...... If you want to have a good laugh click through the presentation MBIA´s Fairytale..... . There are so much low-lights that it is almost impossible to pick the best ones..... Warburg Pincus with their January investment at $ 31 must be proud of their due diligence...... :-). The counterparty risk is increasing.......

Schon sensationell das MBIA immer noch ein AAA Rating mit sich herumschleppt..... Kann jedem der ein bisschen ablachen möchte die nachfolgende Präsentation empfehlen. MBIA´s Märchenstunde........ . Dort sind etliche Tiefpunkte enthalten so das es unmöglich ist einzelne Punkte hervorzuheben..... Besonders glücklich muß wohl Warburg Pincus sein die groß zu $ 31 Ende Januer eingestiegen sind........ Das Risiko das eine Gegenpartei demnächst nicht in der Lage sein wird abgegebene Versprechen einzulösen dürfte demnächst explodieren........

MBIA Posts Loss of $2.4 Billion as CDO Slump Deepens Bloomberg

MBIA had insured bonds backed by home equity lines of credit and closed-end second loans totaling $21 billion at the end of 2007, according to the company.

MBIA: "Forensic experts reviewing loans" Calculated Risk

> Visit the presentation at page 38 for more details..... Funny to see that they were surprised that the " historical cumulative loss levels of 1-2%" is no longer in play......Clearly a sign that their own loss assumptions are superior to the fair value accounting....... Here comes a quote from MBIA from October 2007 MBIA / Denial "The Company believes that the “mark-to-market” loss does not reflect material credit impairment.".... A few billion in real losses later the confidence outside the rating agencies should be fading at light speed.......

> Mehr nette Details gibt es auf Seite 38 der Präsentation...... Besonders herzerfrischend ist das MBIA sich überrascht zeigt das die historisch niedrige Ausfallrate plötzlich nicht mehr zu gelten scheint..... Ein klares Anzeichen dafpür das man auch weiterhin locker auf die angeblich konservativen Modelle von MBIA vertrauen kann.....The Company believes that the “mark-to-market” loss does not reflect material credit impairment. Ich erinnere noch gerne an das MBIA Zitat aus dem Obktober 2007 MBIA / Denial "The Company believes that the “mark-to-market” loss does not reflect material credit impairment."..... Nach ein paar Mrd. realen Verlusten dürfte die Glaubwürdikeit ausserhalb der Ratingagenturen wohl ein wenig gelitten haben......

UPDATE via Calculated Risk / Bloomberg Moody's: Concerned about MBIA and Ambac

MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said. The first-quarter losses reported by the companies in the past two weeks elevate ``existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's, unit of Moody's Corp., said in a statement today.

Yves from Naked Capitalism sums it up nicely!

Moody's issued the weakest warning it could about the two big monolines. Most observers did not expect the bond insurers' last round of fundraising to carry them very far, and that view appears to be playing out on schedule. We may be moving towards a repeat the January-February drama, with the rating agencies saber rattling until the bond guarantors raise enough money to tide them over for another bit.

> I think we can call this an improvement...This time it took the agencies not years to react to the obvious (sarcasm off).....

> Ich denke man kann das als Verbesserung einstufen....Immerhin dazuert es jetzt nicht mehr Jahre um das Offensichtliche zu erkennen....Ich hoffe meine ironischenhen Bemerkungen werden nicht als echte Würdigung der Ratingagneturen verstanden.... :-)

Blue Pill Accounting At ACA Hits The Wall......

I suggest to read this post from July first ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting" & this from just a few days ago ACA "Hypothetical Speaking....." . In hindsight lots of comments from management, rating agencies & analysts are looking like they really live in the Matrix....... Amazing! Maxedoutmama has also a very good summary on ACA Hell's Bells Ringing On Wall Street

Ich empfehle im Vorwege dieses Post vom Juli ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting" und dieses von vor einigen Tagen ACA "Hypothetical Speaking....." zu lesen um deutlich zu machen wie planlos sowohl das Management, die Ratingagenturen und selbstredend auch die Analysten durch die Welt laufen...... Maxedoutmama hat eine weitere erstklassige Umschreibung zu diesem Thema Hell's Bells Ringing On Wall Street

ACA hits trouble - squared FT
More bad news from the world of structured finance. Lancer Funding II - a $1bn CDO squared - has entered an “event of default”, making it the first CDO squared to hit the wall.

CDO squared are, like the name suggests, CDOs of CDOs. A CDO squared defaulting then, is perhaps significant, since it acts as a litmus test for the broader CDO universe.

And Lancer is also part of a bigger grim picture at ACA Capital, its management company. They reported their Q3s on Monday and joined the banking big-league with a $1.7bn writedown. ACA are a big manager of CDOs and also a leading provider of CDO default insurance policies - which strikes us a pretty shortsighted combination.

Considering that ACA’s prime line of business is in structured finance, a $1.6bn writedown is hardly surprising, but it’s still worthy of note for several reasons:

Firstly, relative to ACA’s size, it’s a very big hit.

Secondly, the writedown ACA has taken may yet be a lot worse. The main cause for concern here is the fact that ACA’s Q3 results only cover the period up to September 30. And the very worst month for CDOs was October. Testament to that the fact that Lancer has now entered an event of default.


And thirdly, as a monoline insurer, ACA’s problems are not just ACA’s problems. The security of their insurance - on billions of dollars of CDO paper - is dependent on the safety of ACA’s own rating. And in the light of such a big writedown and the prospect of more trouble ahead, S&P has put the group on review.

ACA has been used as a “dumping ground” by subprime securitizers says Barrons, and that might now come back to haunt them. Wall Street does indeed seem keen to prop ACA up. According to filings with the SEC, a consortium of banks has provided liquidity facilities to the company. In spite of disastrous performance, banks have also continued to take out ACA insurance, unwilling perhaps, to pull the rug from under ACA’s feet.

Barrons

ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns (BSC), Citigroup (C), Merrill Lynch (MER) and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums.

That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA.If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses.That's why Wall Street has continued to do a brisk business with the beleaguered firm.

In the third quarter, ACA insured some $7 billion of subprime collateralized-debt obligations. Even if the company survives for only another couple of quarters, that would stave off the recognition of billions of dollars of losses.

All of this, of course, is immaterial, because October has happened and its presumably now just a question of time before ACA ‘fesses up to the damage already done. Little wonder that the company’s share price has just gone down and down and down. It stopped just short of collapsing through the dollar mark on Tuesday at $1.09.

IndyMac Increases Credit Reserves 47 Percent to $1.39 Billion

This number from the top Alt-A originator ( 14 percent) gives a hint how ugly the situation has become beyond subprime.

That might give a hint how bad the situation for several other players is that have bought back shares hand over fist during the past years and are more involed in subprime, havn´t sold their originations etc......

bigger / größer via Calculated Risk

Forecasted Home price depreciation ranging between 6% and 10% is factored into our loss expectations that drive valuation and reserves – average HPI declines expected to be around 9%

Diese Zahlen von dem Top Alt-A Kreditgeber ( 14 %) geben ein paar klare Indizien das neben Subrpime auch andere Segmente massiv an Qualität verlieren.

Das läßt erahnen wie übel es für andere Institute aussehen muß die im Gegensatz zu IndyMac in den letzten Jahren haufenweise Aktien zurückgekauft havben und sinnlose wertvernichtende Übernahmen getätigt haben aussehen mag. Ganz zu schweigen von denen die Ihre Riskiken nicht weiterreichen konnten und noch stärker im Subprime Sektor engagiert waren.....

We Hold Direct Credit Risk On $19.02 Billion Of Total Single Family Loans Serviced In Our Whole Loans And In Non-Investment Grade And Residual Securities

> Watch the large percentage of homebuilder credit costs....

> Man beachte den gewaltigen Anteil der Rückstellungen für die Homebuilder.....

In the call they said that they had claer signs in 2005 that the market for builders has peaked, but they have ignored it. Now they are paying a high price. They have stopped making any loans to builders and have no intend to re-enter the market soon.

Im CC hat das Management zugegeben das bereits Ende 2005 ganz klare Anzeichen für Probpleme bei den Buildern zu erkennen waren. Dummerweise wurden diese ignoriert und es wirde munter weiter verliehen. Nun kommt die Rechnung. Immerhin haben Sie versprochen dieses Segment nicht weiter zu bedienen und bis auf weiteres keine neuen Kredite zu begeben.

IndyMac Bancorp Reports Third Quarter Loss of $202.7 Million, ($2.77) Per Share

• Total pre-tax credit costs were $407.7 million (versus $103.5 million in the second quarter of 2007), or a negative impact on earnings per share (“EPS”) of $3.40.
• Spread widening in the private-label (non-GSE) mortgage secondary market resulted in a loss of gain on sale and MBS securities revenue estimated at $167.2 million pre-tax for the third quarter, or a negative EPS impact of $1.39.
• After surviving the global liquidity crisis in 1998 as a REIT, we purchased a federally chartered thrift and put our entire business inside the thrift, with the result that we have no liquidity issues today, while many mortgage companies have gone bankrupt or recorded massive losses due to liquidity shortfalls.
• We protected and bolstered our capital by not repurchasing any shares since 2002 and, in fact, raised a substantial amount of capital in 2007.
• We held virtually no subprime, closed-end seconds or HELOCs for investment purposes ($112 million, or 0.3 percent of total assets at September 30, 2007).
• We were not a major subprime lender, ranking 32nd among subprime lenders (according to the National Mortgage News 2006 survey). Our subprime volume in 2006 was $2.7 billion, or 0.39 percent of the total subprime market.
• While we originated $43 billion of Option ARMs from 2005 through Q3-07, we sold all but $1.0 billion (held for investment) and $2.6 billion (held for sale), and we retained no non-investment grade or residual securities related to these loans.
• We laid off virtually all Alt-A 2005/2006 credit risk into the secondary market, retaining only $7.0 million in non-investment grade and residual securities from this production.
• We hold no investments in collateralized debt obligations (CDOs) or structured investment vehicles (SIVs) and only hold mortgage backed securities (93.5 percent of the investment grade MBS are rated AAA and AA, none of which have been downgraded).
• We made one of the only successful acquisitions this decade in the mortgage business – Financial Freedom, the largest reverse mortgage lender in the nation – while virtually all other significant acquisitions have produced very poor results.

> Almost all of the new liquidity is coming from the Federal Home Loan Banks ......

> Fast die ganze zusätzliche Liquidität kommt von Seiten der Federal Home Loan Banks ......

Our operating liquidity is at an all time high of $6.3 billion at 9/30/07, up 54% from $4.1 billion at 6/30/07, and we have no reverse repurchase borrowings or extendable assetbacked commercial paper…95% of our borrowings are deposits, FHLB advances and long-term debt

> the next slide shows a nice Level 3 aka "Mark-to-Make-Believe Gains" etc gain. Wonder why they havn´t used an assumption that would have cover the entire loss from the credit costs.......... Maybe they are conservatice.......

> Nebenbei bemerkt zeigt die nächste Grafik das auch hier mal wieder ein nicht ganz unerheblicher Level 3 aka Mark-to-Make-Believe Gains etc Gewinnbestandteil. Schon erfreulich das Sie nicht gleich eine Berechnungsgrundlage berechnet haben die gleich die gesamten Verluste im Zusammenhang mit den Kreditkosten abdeckt...... Evtl. ist IndyMac ja betont konservativ......

I want to highlight the IndyMac Presentation / pdf that is full of details about every aspect of the mortgage market

Ich möchste Euch in diesem Zusammenhang die IndyMac Präsentation / pdf ans Herz legen die vollgepackt mit Details zur aktuellen Verfassung der Hypothekenmärkte ist.

As clear as alphabet soup: banks’ CDO exposures

I think the term "Black Box" is not an understatement....... Maybe some still think their exposue is hedged via MBIA & Co. Good luck...... I also suggest to read From level three to cloud nine from Roubini via the FT & the take from Mish. Keep this in mind when some "experts" are still hyping the high dividend yield and the strong balance sheets.......

Ich denke hier trifft der Begriff der Black Box ziemlich genau ins Schwarze....... Evtl. haben ja einige Ihre Bestände auch durch MBIA & Co abgesichert und sind daher der Meinung nicht tätig werden zu müssen. Viel Glück........ Zudem solltet Ihr Euch From level three to cloud nine von Roubini via der FT und die Beurteilung von Mish nicht entgehen lassen. Behaltet diese Zahlen im Hinterkopf und schaltet am besten die Glotze ab und überspringt den Artikel in denen immer noch auf die starken Bilanzen und die hohen Dividenden hingewiesen wird.....

As clear as alphabet soup: banks’ CDO exposures / FT

Forget the banks’ Q3s. By any account, they’re billions of dollars out of date. For banks holding CDOs - and that’s most of Wall Street - writedowns will have greatly increased in the past three weeks.

The trouble is, no one, not even the SEC, knows exactly what banks’ exposures are. But the losses are beginning to come out of the woodwork: for Citi, in the news Monday, a $8bn-$10bn loss on the value of some assets. For Merrill Lynch, last week, it worked out at $8bn. For UBS, reporting their Q3s last week, $3.4bn.

Citi have painted the most comprehensive picture to date. But rather than making things clearer, it simply casts doubt on the other banks’ disclosures. Citi, for example, are reporting $8-10bn writedowns on a portfolio containing $10bn of high-grade CDO paper - which has been the principal faller in the past two weeks. But UBS only report writedowns of $3.4bn. And they hold $20bn of high-grade CDO paper.

There are very few proxies which can be used to judge banks’ CDO holdings. Even a league table of CDO deals arranged is a pretty poor indicator:

An added complication is the fact that banks are using wildly different estimates on the pricing of CDO assets. Although indices such as the ABX and TABX are valuable proxies for the market’s prices as a whole, they don’t necessarily reflect where banks individually are pricing their debt.

As reported in today’s FT, for example, Merrill Lynch, has written down mid-quality ABX debt to 63 cents in the dollar, even though the bank’s own analysts say its worth only 40. UBS, meanwhile, assumes the same debt to be worth 90 cents in the dollar. “Simple math would imply that UBS needs an additional $8bn write-down [on its $15.4bn holdings] if the ABX pricing is correct,” Merrill themselves had the cheek to point out in a report on their rival.
Here’s a breakdown of the main CDO exposures:

Citi
$10bn senior rated CDO debt
$8bn mezzanine CDO debt
$2.7bn “warehoused” CDOs
£200m CDO squared


Merrill Lynch
$8.3bn senior rated CDO debt
$5.3bn mezzanine CDO debt
$1bn “warehoused” CDO debt
$600m CDO squared


UBS
$20.2bn senior rated CDO debt
$1.8bn warehoused CDO debt

Total exposure undisclosed:

Bank of America
Undisclosed

Barclays
Q3s due November 27

Deutsche
$1.6bn on “trading activities in relative value trading in both debt and equity, CDO correlation trading and residential mortgage-backed securities.”

JPMorgan
$339m (net of hedges) “on collateralized debt obligation (CDO) warehouses and unsold positions.”

Lehman Brothers
Undisclosed

Morgan Stanley
Undisclosed

Wachovia
$534m writedown on CDOs

Citi Has Found Another $11 Billion....But Has No Plans To Reduce its Dividend level....LOL!

Thank god they don´t cut the dividend.... What a farce.... Maybe they will pimp this at CNBC and try to dance around the $ 11 billion overnight "adjustment" like the former deaf & ingorant CEO Prince. Maybe someone should tell MBIA & Co that their view on billions of CDO´s with only a low single percentage haircut is looking more and more like David Lereah during the years 2003-2006 . Maybe this guy is running their internal "models".......

Gottseidank wrd die Dividende nicht gekürzt......Da kann man natürlich leicht über die 11 Mrd $ an zusätzlichen Abschreibungen hinwegsehen. Es würde mich nicht wundern wenn es die Crew bei CNBC schafft die Dividenstory als Headline zu promoten. Besonders freut mich zudem das der ehemalig taube und ignorante CEO Prince inzwischen Geschichte ist. Evtl. sollte mal einer die letzten Abschreibungen von Citigroup mit denen von MBIA & Co ins Verhältnis setzen. Deren Sicht der Dinge mit Abschreibungen in niedrigen einstelligen Bereich sieht immer mehr wie ein verspäteter Aprilscherz aus . Evtl. ist ja dieser Typen für die Berechnung der Schadenmodelle zuständig.....

Slicing and dicing Citi’s subprime exposure / FT

Citi announced on Sunday night it was currently facing writedowns of between $8bn and $11bn, on top of the dismal numbers already reported in its Q3 statement.

What is truly shocking, however, is the speed at which these losses have been realised. Barely a month ago, Citi’s pre-Q3 trading statement, warned that it expected to realise $1.3bn on subprime-related writedowns. Which means that figure has now increased at least sixfold. To put it another way, on average Citi’s subprime-linked assets lost more that $2bn in value each week.

Citi has now disclosed it’s estimated total subprime exposure. Of the $55bn total, some $11.7bn is in its lending and structuring business and a staggering $43bn lies in exposures to collateralized debt obligations (CDOs) - huge baskets of mortgage securities.

CDOs have seen prices crash in the past two weeks, as rating agencies have slashed ratings on hundreds of mortgage backed securities. As FT Alphaville reported last week, banks could be expected to reveal more writedowns as the market tanked.

Of the $11.7bn subprime exposure Citi estimates it has in its lending and structuring business, $2.7bn lies in a “warehouse inventory” of unsold CDOs, $4.2bn in actively managed subprime loans intended for securitization and $4.8bn in financing transactions which have subprime collateral.

Of the remaining $43bn exposure, Citi estimates it has $18bn in CDOs: $10bn of which is in high grade tranches, almost $8bn in mezzanine tranches and some $200m in CDO squared structures. The remaining $25bn, says Citi, is in exposure to subprime CDOs through commercial paper. But Citi does not say what issues that CP: whether it is through off balance sheet vehicles, such as SIVs, is unclear.

Goldman:Aug level 3 asset value $72.05B, 7% of total

Add the level 2 component and you have well over 50% of assets that are "not transparent"..... If you want to read more on this issue read Level 3 " Mark-To-Make-Believe Gains" & Level 2 "Mark-To-Model" or surf the labels....

Wenn man jetzt noch die Level 2 Bestandteile addiert kommt man auf satte 50% plus X der Vermögenswerte die nicht transparent nachvollzogen werden können. Mehr zu diesem Thema Level 3 " Mark-To-Make-Believe Gains" & Level 2 "Mark-To-Model" sowie unter den Labeln

Thanks to Bespoke

via Marketwatch Goldman:Aug level 3 asset value $72.05B, 7% of total

...the size of its level 3 assets at the end of third quarter increased to $72.05 billion from $54 billion at the end of the second quarter.

Goldman Sachs said level 2 assets at the end of third quarter amounted to $494.6 billion. There may be some market activity for level 2 assets but the valuations often depend on internal models

Goldman Sachs disclosed that the net unrealized gain on level 3 derivative contracts amounted to $2.62 billion in the third quarter, saying the gains resulted from changes in level 2 reclassification as opposed to level 3 changes

In connection with its lending activities, the firm had outstanding commitments to extend credit of $135.53 billion as of August, compared with $100.48 billion at Nov. 30 fiscal yearend

> Goldman is up 45 per cent since its low on August 15th.......... I´ll stay with gold and the miners......

> Seit dem Tief vom 15.08. hat Goldman u.a. dank dieser Bilanzierung mal eben 45% zugelegt........ Ich für meinen Teil bleibe lieber beim Gold und den dazugehörigen Minen......

Earnings Quality Part XXIII........

Another example why you should read the earnings news especially from financial with great scepticism......Add this to the list of "creative accounting" like Negative Amortisation, Level 3 " Mark-To-Make-Believe Gains", Level 2 "Mark-To-Model", "Preferred Measurements Of Income", loan loss "politics" Part 1 & Part 2 etc.......

Einmal mehr Beleg dafür das man besonders die Ergebnisse der Finanzinstitute mit einer gewissen Portion "Skepsis" betrachten sollte......Hier ein paar weitere Beispiele die belegen das nicht wirklich "konservativ" bilanziert wird Negative Amortisation, Level 3 " Mark-To-Make-Believe Gains", Level 2 "Mark-To-Model", "Preferred Measurements Of Income", Risikovorsorge Teil 1 & Teil 2 etc.......

Brokers' Head-Scratcher / WSJ

Still, some investors remained concerned about earnings quality, in part, because the firms all benefited from a tumble in the value of their own debt. Accounting rules require firms to take a gain on such declines if they are applying market values to some forms of debt or financial instruments.

At Bear Stearns, the already dismal quarter would have been even worse without about $225 million in such gains. Morgan Stanley, which also had a rocky quarter, said it booked $390 million in such debt-related gains, while Goldman said it benefited from nearly $300 million in this way. Lehman didn't specify its gains, but said they helped lower to $700 million the hit the firm took from markdowns on loans and securities.

Hat tip to Barry Ritholtz

Keep this in mind when Wall Street is pointing to low pe´s......They also often forget to mention that financials are the biggest sector of almost every major US index....

Behaltet all das im Hinterkopf wenn der nächste Analyst mal wieder auf die niedrigen KGV´s verweist....... Zudem wird nur zu gerne unterschlagen das Finanzwerte der mit Abstand wichtigste Sektor aller US Indizes sind....

Wells Fargo Gorges on Mark-to-Make-Believe Gains

Why i´m not surprised....... Looks like the earnings quality is "subprime". Combine this with the fact that financials account for over 30% of the S&P 500 earnings and you get a picture how "cheap" this market really is.......

Warum überrascht mich das eigentlich nicht mehr......Es sieht so aus als wenn auch die Gewinnqualität immer mehr "Subprime" zu sien scheint. Kombiniert mit der Tatsache das der Finanzsektor für über 30% der S&P 500 Gewinne erkennt man das die Dauerberieselung von einem "günstig" bewerteten Markt plumpe PR ist.

Aug. 22 (Bloomberg) -- There's the kind of earnings investors can take to the bank. And then there's the kind the bank can show to investors.

Word to Wells Fargo & Co. investors: Beware the second kind.

Last quarter Wells Fargo reported record net income of $2.28 billion, up 9 percent from a year earlier. Read the footnotes to its latest quarterly report, though, and you will see a new term in accounting lingo called ``Level 3'' gains. Without these, the financial-services company's earnings would have declined.

So what are Level 3 gains? Pretty much whatever companies want them to be.
You can thank the Financial Accounting Standards Board for this. The board last September approved a new, three-level hierarchy for measuring ``fair values'' of assets and liabilities, under a pronouncement called FASB Statement No. 157, which Wells Fargo adopted in January.

Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to- market.

Level 2 values are measured using ``observable inputs,'' such as recent transaction prices for similar items, where market quotes aren't available. Call this mark-to-model.

Then there's Level 3. Under Statement 157, this means fair value is measured using ``unobservable inputs.'' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe.

Antennae Up
``If you see a big chunk of earnings coming from revaluations involving Level 3 inputs, your antennae should go up,'' says Jack Ciesielski, publisher of the Analyst's Accounting Observer research service in Baltimore. ``It's akin to voodoo.''

For San Francisco-based Wells Fargo, whose stock is up 5 percent this year at $37.37, last quarter was a veritable mark- to-make-believe feast.

About $1.21 billion, or 35 percent, of its $3.44 billion in pretax income came from Level 3 net gains on the $18.73 billion portfolio of residential mortgage-servicing rights that Wells Fargo marks at fair value. These assets, known as MSRs, consist of rights to collect fees from third parties in exchange for keeping mortgages current, by doing things like collecting and forwarding monthly payments.
Thanks to Randy Glasbergen
Wells Fargo's July 17 earnings release didn't mention Level 3 items. This isn't how the second-largest U.S. home lender wants investors to parse its earnings either.

Hurting Earnings
Instead it stresses a metric called ``market-related valuation changes to MSRs, net of hedge results,'' which was minus $225 million last quarter. Spun this way, it looks like changes in the servicing rights' values actually hurt earnings.

To get that figure, the company first broke the $1.21 billion of net gains on MSRs into two parts.

Part one was $2.01 billion of gains ``due to changes in valuation model inputs or assumptions.'' Part two was $808 million of fair-value declines from changes related to the servicing rights' expected cash flows over time. (All figures are rounded.)

Next, Wells Fargo took the first part -- the $2.01 billion in gains -- and netted it against $2.24 billion in fair-value losses on certain ``free-standing derivatives.'' The company says it uses these derivatives as ``economic hedges'' against changes in MSR values, although they don't qualify for hedge accounting under the accounting board's rules.

The Rub
Here's the rub: The footnotes show the vast majority of the $2.24 billion in derivative losses were Level 1 or Level 2, while the $2.01 billion in MSR gains were all Level 3.

In other words, it's a safe bet the losses were real, while the gains had all the substance of a prayer. Indeed, Wells Fargo said in its Aug. 6 quarterly report that ``the valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable.''

Moreover, to get to minus $225 million for ``market-related valuation changes to MSRs, net of hedge results,'' Wells Fargo excluded the other $808 million in MSR losses, meaning these fair-value changes weren't hedged at all.

In an e-mail, Wells Fargo spokeswoman Janis Smith Appleton said ``it would be inaccurate to characterize one component of our servicing revenue for the quarter in relation to our total results.'' She said that's ``because it would ignore the effect'' rising interest rates had ``on both the increase in fair value of our residential MSRs as well as the corresponding net derivative losses associated with the economic hedges of our MSRs.''

Real Stretch
Inaccurate? No. The real stretch is calling these derivatives hedges.

Nobody forced Wells Fargo to start running quarterly fair- value changes for MSRs through its income statement. The accounting standard that let it do so, called Statement 156, gave it a choice.

SunTrust Banks Inc., by comparison, elected not to. Why? ``In my mind there is no effective hedging strategy out there that captures all those risks that would move in offsetting directions to MSR,'' says Tom Panther, SunTrust's chief accounting officer. So, SunTrust waits until the servicing rights are sold before recognizing any pent-up gains.

MSR values normally rise when interest rates do, because fewer customers refinance and prepay their mortgages. At some point if rates rise too high, though, delinquencies on adjustable-rate mortgages could soar, as customers' rates reset, pushing MSR values down.

With mortgage markets now crashing, SunTrust looks like it made the more prudent choice. Yet in the lunch buffet of generally accepted accounting principles, both companies' approaches are permitted.

Someday, Wells Fargo investors may regret this.

Subprime Shockwaves / Bloomberg Special with Faber, Rogers, Shiller etc..

Excellent summary ! Unfortunately is the quality of the streaming also subprime......Click on the headline to start the video. Quick summary including Syron, Chanos and Faber

Das ganze Debakel klasse zusammengefaßt. Leider paßt sich die Qualität der Übertragung dem Thema an.....Klickt bitte auf die Überschrift um das Video zu starten. Hier die Zusammenfassung der Meinungen von Syron, Chanos und Faber

ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting"

Oh Boy! Read the comments from the company which use their own measure of accounting and the analysts and you know how rotten the market has become. I think it is no coincidence that Bear Stearns is again involved. Needles to say that all 4 analysts have buy ratings on the stock! It gives you a good feeling when companies like ACA are providing insurance for billion of paper, doesnt´t it.....This number is taken from the 2006 annual report (large pdf ) titled "Understanding The Value" making allusions to the "enigma". This pdf could be real fun to revisit when the company runs into further trouble .......

ACA Capital’s Structured Credit business provides credit protection, using credit default swaps, on tranches of credit portfolios. We are primarily a seller of credit protection on tranches where the risk of loss is greater than that of the “AAA” rated level. We will sell credit protection below the “AAA” rated level but only when we see unusually strong value. The credits that underlie the portfolios on which we sell credit protection include corporate bonds and loans and mortgage and asset-backed securities

At the end of 2006, we had $39.4 billion of notional exposure in our Structured Credit business, with over 99% attaching at greater than “AAA” rated levels. ( End of Q1 already over $ 50.2 billion...)

Here is more from Mish on this topic

Das ist wirklich kaum zu fassen. Lest Euch bitte die Kommentare des Unternehmens durch die mal eben eine eigene Art der Buchführung benutzen. Dazu kommen einmal mehr vollkommen nutzlose Analysten die entweder wirklich nicht begreifen was Sie den ganzen Tag analysieren oder ..... Das verkneife ich mir lieber :-) Es ist sicher auch kein Zusfall das Bear Sterns erneut involviert ist. Überflüssig zu erwähnen das alle 4 Analysten Kaufempfehlungen haben. Zudem gibt einem das ganze doch gleich ein gutes Gefühle wenn Firmen wie ACA Mrd. von Papiern "versichern". Der o.g. Jahresbericht könnte in der Rückbetrachtung wenn ACA komplett implodiert ist recht lustig werden. Titel ist "Understanding The Value" und macht Anspielungen auf die Enigma....

By its own measures, everything looks good at ACA Capital Holdings, a financial management and insurance company. But other numbers do not look so good, and the stock price is falling rapidly. The company will not comment on what is going on.

In New York Stock Exchange trading yesterday, ACA shares fell 22 percent, dropping $1.87, to $6.59, on the heaviest volume in the company’s brief history. The shares have lost a third of their value since Thursday, and are trading at less than half of their value a month ago.

ACA has written billions of dollars worth of insurance on the value of financial assets, and it manages collateralized debt obligations, or C.D.O.’s — investment vehicles that invest in bonds backed by risky mortgages and other debt — on billions more. Some of the C.D.O.’s it manages for others were mentioned by bond rating agencies last week as candidates for downgrading.
But it is not clear how much pain ACA could suffer from the subprime market. In detailing its exposure to subprime mortgage loans on its Web site last week, the company said that nearly all of its direct exposure to subprime mortgage debt came through securities rated AAA by at least one bond rating agency. Such securities have generally held their value even as others have plunged in market value amid turmoil in the subprime market.
> "generally hold their value" ..... this comment is almost criminal

> der Kommentar das die AAA Papiere ihren Wert gehalten haben ist schon fast kriminell

Late yesterday, Standard & Poor’s, the rating agency, said it was considering lowering ratings on various securities issued by 19 C.D.O.’s, including 4 managed, though not owned, by ACA. The agency said the moves “reflect the increased probability of default” of underlying mortgages.

Until last month, ACA’s assurances had satisfied investors, although the stock suffered briefly on May 10, when it reported first-quarter earnings. Under normal accounting rules, those results showed that profits were down sharply, and that book value had plunged because of declines in market value of some assets.

But the stock quickly recovered to above $14 a share after the company pointed to its own adjusted measures of earnings, which showed rapid increases in both profits and book value.

In June, the shares began to slide again after the company said that insiders, primarily private equity firms that owned the company before it went public last November, wanted to sell 3.9 million shares, more than a tenth of the shares outstanding.

The proposed offering by insiders was quickly withdrawn after the stock came under pressure, but the selling intensified last week.

The company’s largest shareholder, with a 27.6 percent stake, is a fund managed by Bear Stearns Merchant Banking, an affiliate of the Bear Stearns Companies, whose own shares fell $2.58 yesterday, to $140.31. Last month, Bear Stearns was forced to bail out a hedge fund it managed that had suffered losses in subprime mortgage securities.

After ACA disclosed the extent of its subprime exposure last week, Craig Siegenthaler, an analyst at Credit Suisse, said the disclosure increased the risk profile for ACA, and reduced his price target on the stock to $12, from $17.

In a report yesterday morning, Geoffrey Dunn, an analyst at Keefe, Bruyette & Woods, reduced his earnings forecast, saying that ACA’s price had fallen because it “has no real comparable peers in the publicly traded markets, is very complex and seems to operate in areas that are at the heart of the market’s current concerns.”

But, Mr. Dunn said in an interview, “in our worst-case scenario, we think the stock has a double-digit valuation.” He said the price decline was not caused by “fundamentally legitimate concerns.” > What is this guy smoking? Worst case scenario and still double digit?

Under generally accepted accounting principles, ACA was required to take a loss for the fall in value of some derivative securities it owned, and to reduce its book value for the decline in other securities. A result was that profits were down 17 percent from a year earlier, although the company still reported profits of $11.4 million, or 31 cents a share. Its book value fell to $11.62 a share, from $13.96 at the end of 2006.

But ACA told investors that those numbers were misleading, and its chief executive, Alan S. Roseman, said the results “underscore our ability to produce significant growth throughout changing market conditions.”

Thanks to Randy Glasbergen

Mr. Roseman said that ACA’s preferred measurements of income, called net economic income and base economic income, were each up 41 percent from a year earlier. That was largely because those measurements ignored losses in derivative securities owned by the company. Assuming, as the company does, that those derivatives return to original value, there will be no long-term losses, the company explained.

In computing its adjusted book value, the company not only excludes those derivative losses but also adds in the value of future fees it will collect for managing C.D.O. portfolios. By that measure, adjusted book value rose to $24.91 a share, from $22.93.

ACA’s competitors in insuring C.D.O. values generally have AAA ratings from the rating agencies. But ACA has only an A rating, indicating a financial position that is less solid, although still good. In affirming that rating in June, Standard & Poor’s said ACA had insured $10.3 billion in C.D.O.’s that invested heavily in subprime mortgage bonds. While that made up nearly a quarter of all bonds insured by the company, S.& P. said that the bonds ACA insured were themselves rated AAA.

>Thank God for the always up to date rating agencies and the prudent due dilligence from buyers of this safe securities.....

> Gott sei Dank haben wir ja die stets aufmerksamen Wächter der Bonität und eine genaue Prüfung der Käufer der mit AAA besucherten Papiere..........

More from Bloomberg
ACA's statement showed that for $6.1 billion of ACA's contracts, the company would start taking losses even before all of the low-rated subprime-mortgage bonds from 2006 and 2007 defaulted

For another $2.8 billion of contracts linked to higher- rated debt, the company may lose money before all the derivatives on CDO securities within them defaulted. Analysts such as ones at Wachovia Corp. say among ``high grade'' CDOs, those made up of many CDOs may face the most losses. ACA also had $444 million in exposure to a CDO containing only CDO bonds, compared with $911 million of adjusted book value, Credit Suisse analysts said.

>If someone knows more about this company and has some insights about the insurance business please leave a comment. I still having problems how it is possible to insure tens on billion with equity under 500 mio and still get an AAA rating. I was a long time shareholder from Depfa (German stock) that is also involved in the financial guaranteed business. But they only provide the guarantee on state backed underlyings / public sector finance. Quite a difference to what ACA is doing.... I hope that i´m missing a point here...Otherwise this is even worse than i could have imagined it.....

>Wenn einer von Euch mehr Hintergrundinformationen hat wie es möglich sein kann das eine kleine Klitsche mit unter 500 mio an Kaiptal bei etlichen Mrd an Papieren als AAA Versicherer auftauchen kann laßt es mich wissen. Kenne hier als langjähriger Depfa Aktionär die gleiche Konstruktion mit dem Unterschied das die ausschließlich staatliche Underlyings garatnteirt haben. Ein nicht ganz zu unterschätzender Unterschied.......

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