Straight Talk on the Monoline Mess

By: Reggie Middleton | Sun, Feb 17, 2008
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Let me be clear on how my common sense, outside the box mentality views this mortgage insurer mess as of now. I haven't revisited this in a while. A few facts:

  1. Bad debt is bad debt. It really doesn't matter if Moody's or Fitch downgrades or upgrades XYZ corp to AAA or CCC. If the market knows its junk (ex. paying 14% in a 7% interest environment like MBIA) then its junk. The companies trying to struggle to keep their AAA rating should be stuggling to prove they are not junk to the market. They are praying to the wrong gods.

  2. If any of the major mono cum multi-lines do split up and separate structured product from muni risk, the banks will be swamped with devaluations, and we will be taught the true definition of "writedown". Of course, this could just be a threat to the banks to have them pony up. Blackstone is a part owner of FGIC (the company that applied to be split) and they know their way around money. This is a quote from Dinallo (the NYS insurance commissioner) "We will look at the business plan and we will see where it goes," New York Insurance Superintendent Eric Dinallo said in a Bloomberg Television interview today. "Maybe just the filing of the application will invite capital in," he said." Of course, having insureds invest money into the insurers to save the insured portfolio defeats the purpose of buyign insurance in the first place. In addition, it doesn't technically qualify as insurance, since economic risk was not truly transferred in exchange for compensation. All you are doing is moving money from the right pocket to the left pocket. You are no safer or more insured for doing so. I went through this in my first post on the monoline industry.

  3. Everyone is focused on the muni industry and how safe it is, but I warned last year that the drop in revenue from housing related fees, income taxes, and the like will combine with the rapidly inflated budgets of the boom times to shock and surprise many who believe that muni debt is bullet proof.

  4. For those who remained focus on the muni side of this debacle, let me remind you that if Buffet buys the choice muni debt or the monolines are bifurcated, the CDS market will collapse faster and more violently than the subprime market. Hedge funds, investment/mortgage/commercial banks, and reinsurers will get slammed, and some of them may be gone for good. I have carefully positioned myself for such an occurence for it is inevitable in some form or fashion. The structured product insurance business in its current form is done for.

  5. I am amazed at just how many people ensconced in this industry still do not realize how much trouble it is in. A friend of mine who actually provides the legal support and structure for the industry seriously believes that Buffet's offer will help the industry. Huhhh??? I see it as the hari kari sword that Buffet has so generously offered. Buffet's plan is worse than the bifucation plan, because his would drive the whole company out of business for Buffet's gain. Not that there is anything wrong with that. I am all for capitalism, unless I was a monoline shareholder that is. At least the bifurcation plan would save some of the company. They both are the only ways to go for the municipal insureds though. The NYS Port Authority is now paying 20% on their monoline insured debt because of a downgrade, up from around 4%.

  6. No matter what happens, if the capital strained banks (who are severely hard up for capital, which is why they are accepting onerous terms from foriegn investors) provide capital, or the mono cum multilines bifurcate, or if Buffet buys out the muni risk for that "free profit": the structured product defaults will overcome the relatively anemic capital reserves that have been put in place against them.

Those (ex. the banks) that took those risks and relied on a anemic structure to hedge will be forced to pay dearly. The reinsurers will get hit quite hard as well. The muni market will suffer in every scenario except bifurcation or Buffet's way. The shareholders will suffer in all scenarios. They will be more diluted than grandma's chicken soup sitting under a leaky faucet. MBIA is trying to raise the vast majority of what was their market capitalization. Bifurcation will kill whoever holds the structured product company stock. We all know what Buffet has in mind for the industry: Mine! Mine! All Mine! This my attempt at recreating that Bugs Bunny and Daffy Duck scene where they found all of that buried treasure.

 


 

Reggie Middleton

Author: Reggie Middleton

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