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April 07, 2008

Fitch has Stripped MBIA of it's AAA Rating - The Consequences...
by Reggie Middleton

Here we go. It is amazing that the investment banks have rallied, particularly considering that most of them rely heavily on MBIA and Ambac as counterparties. Here is nearly all of the MBIA holdings of Morgan Stanley (many billions of dollars worth), recently downgraded: Morgan Stanley_final_040408 (1.38 MB). A comprehensive forensic deep dive, economic analysis and update of Morgan Stanely will be following shortly. Stay tuned...

• Fitch Ratings cut MBIA Inc.'s insurance rating to AA from AAA: bond insurer short of $3.8bn capital to warrant the top ranking. Outlook negative.

• BIS: Monoliners have written roughly $450bn of super-senior protection on CDOs in the form of CDS contracts. About $125bn of these reference ABS CDOs. Counterparties to these trades are large banks, securities firms or off-balance sheet vehicles like ABCP conduits/SIVs.

• Fitch: As of July 2007: Industry gross insured portfolio = $2.5trillion; industry shareholder equity = $24.5bn (=leverage ratio of 100x)

• The industry guarantees $1.2trillion municipal bonds and around $800-900bn in structured finance products. CDS portfolio is $463bn (net seller). $287bn (or 61%) of CDS written on corporate bonds; 14% on RMBS.S&P: Banks hedge about $125bn of CDOs with monoliners (senior, super-senior tranches)

• FT Alphaville: Fitch downgrades SCA monoline bond guarantor rating from AAA to junk--> needs around $5bn to regain AAA rating. FGIC downgraded again also by S&P--> April 3: FGIC given 30 days by regulator to raise new capital to avoid worst-case scenario.

• Tett: Some Federal Home Loan Bank (FHLB) member banks want to offer their AAA rating to municipal infrastructure projects. However, FHLB role is already being expanded for mortgage purchases and their capital is stretched already.

• Fahey/Scott: Exposures to financial guarantors arise from:
  - CDS counterparty exposure associated with CDO, CMBS, RMBS, other ABS and corporate bond hedges;
  - Trading inventories of equity or debt of guarantors;
  - 'Wrapped' securities held in trading or investment portfolios;
  - Muni bonds wrapped in association with Tender Option Bonds (TOB) and Variable Rate Demand Obligations (VRDO) programs [i.e. off-balance sheet entitites with liquidity backstop lines]
  - Loss protection for conduits;
  - Potential support for money funds containing enhanced securities.

• Davies: Additional risk: unwinding of negative basis trades: difference between higher bond yield and lower cost to insure (with monoliners) that same bond (usually due to oversupply of CDS)--> buying both gives positive and risk-free return usually above Treasuries.

• Oppenheimer: Banks may write down $70bn if major monolines lose AAA

• Egan Jones: Bond Insurers Need $200 Billion to Retain AAA

For anybody who is interested, I am making available info on several other institutions with downgraded MBIA insured inventory. This is no trivial occurrence, and in my opinion it was long overdue (for those of you who don't remember, reference my Super Scary Halloween Tale of 104 Basis Points). Below are the results of my proprietary research on broker/bank direct Ambac and MBIA counterparty exposure. This is the link to Fitch's analysis of the same (requires free registration).

1st Franklin ABS Inventory
BAC ABS Inventory
C ABS Inventory
CFC ABS Inventory (these guys were just downgraded themselves, hat tip to Paul)
CTX ABS Inventory
LEH ABS Inventory
ML ABS Inventory
Wachovia ABS Inventory
WaMu ABS Inventory
Wells Fargo ABS Inventory

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

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So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

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So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.

Copyright © 2007-2008 Reggie Middleton

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