'Yall remember how I (and others) were talking about the monolines and their balance sheets - and that downgrades would lead to forced capital postings?
Guess what - here 'ya go:
"June 21 (Bloomberg) -- MBIA Inc.'s five-level downgrade by Moody's Investors Service probably will force it to make $7.4 billion of payments and collateral postings.
MBIA has $15.2 billion of assets available to satisfy the requirements, the company said yesterday in a statement. That includes $4 billion in cash and short-term investments, $1 billion of unpledged collateral and $10.2 billion of other securities, MBIA said."
There is a little problem here. Only $4 billion is in cash, and they need $7.4 billion. Oh, and they can't hit the Fed window. They will thus be forced to sell off a significant part of their security portfolio - it will be interesting to see how much they fetch in such a forced sale environment.
They won't be alone in this.
This remains a radically-unappreciated problem in the markets. It is not just that all of these firms are at risk of going under (although that's a risk in its own right) - it is that when they blow up the ratings downgrades on everything they wrote wraps on - the "underlying credit quality" - threatens to sink the holders of that debt.
For most funds and holders its a nasty capital loss, but for banks and others who have a reserve requirement this sort of ratings change can literally force immediate insolvency, as in some cases the reserve requirements can expand by ten or even one hundred times, depending on the severity of the downgrade.
Oh, if you think this is a "WTF?" moment, you ain't seen nothing yet. Check this out:
"NEW YORK, June 22 (Reuters) - Bond insurers such as Ambac Financial Group, MBIA Inc and FGIC are talking to banks about wiping out $125 billion of insurance on risky debt securities to limit the damage to the insurers from the credit crisis, the Financial Times reported on its website on Sunday.
Discussions about "commuting" these insurance contracts, which were sold by the bond insurers to banks in the form of credit default swaps (CDS), have taken on a renewed sense of urgency amid a rash of rating downgrades in the bond insurance sector, the report said."
Hahahahaha....
In some of my discussions I have noted that one of the likely outcomes is that these contracts would simply be repudiated - whether voluntarily or not.
The effect of this is to force the underlying credit quality of these instruments to immediately "shine through" and show up on the institution's books. Now is this good or bad? Its bad in all instances, but it basically is a gambit to save the business of these insurers, who are probably bankrupt otherwise.
So why not force them into bankruptcy? Because you still don't get anything if they go under!
So from the standpoint of the buyer of the protection, they lose either way. This is somewhat akin to feeding someone a poison-laced dinner, then asking them not to shoot you for doing it because they're going to die anyway. They might, or they might not, but either way the outcome for them is not going to change.
Interesting strategy.
Oh, supposedly the The Fed and SEC are "near" to finalizing an agreement on "greater regulatory transparency":
"The agreement, which could be announced this week, aims to fill gaps in regulatory oversight and will increase cooperation between the central bank and the SEC in the wake of the near-collapse of Bear Stearns Cos, the report said.
....
Under the agreement, the Fed would be able to see an investment bank's trading positions, its leverage and its capital requirements, the Journal said."
That'll be nice.
Anyone else see a problem with this?
Note that Jamie Dimon is on the board of the NY Fed. How do you solve the conflict of interest problem that naturally arises from JP Morgan's CEO potentially having access to the trading positions, leverage and capital requirements of its competitors?
Oh probably by not solving it at all.
So now we're going to create a "superclass" of people who have access to their competitors positions and leverage ratios, and can then engage in raids on them any time they'd like?
For obvious reasons I do not believe that any alleged "Chinese Walls" that might be erected would be worth the paper they're printed on.
This sort of thing would be funny, if it wasn't so obviously stupid. Why would anyone be willing to play Poker in a casino where certain parties at the table had access to mirrors behind your head and could see your hole cards?
There is only one way out of this mess folks and that is for everyone to be forced to follow the same rules that I and you are forced to when we invest in the markets:
At 4:15 PM ET every day (when the futures market closes) all positions are marked to the market. If there is no bid for an asset on that day, then its market value is zero. My books must balance and my margin requirements must be met each and every day at the close of business.
If an asset that was worthless subsequently receives a bid on a later date, then I mark it back up to whatever that bid might be - but on the day it goes "no bid", it is marked at zero.
I, you, and every other "mortal" who plays in the markets is forced to live under these rules. We are in this mess because we have anointed certain "Supertraders" who are allowed to play by different rules - they are allowed to make up values for assets which have no bid, putting them in "Level 3" buckets and inventing out of whole cloth a valuation simply because they don't like what the market says they are worth on a given day, week, month or year.
I, you, and every other "mortal" who plays in the markets is not allowed to take losing positions and stick them in "bankruptcy remote" vehicles like SIVs and VIEs. Our brokerages will not allow us to trade in a vehicle that has no tie back to us beyond the level of actual, marked-to-market assets in that vehicle. We can't "lend" our credit rating to someone else, except by literally taking on the risk of default ourselves (e.g. co-signing a loan), unlike these "Supertraders" who are allowed to "lend" their credit ratings with impunity - and without risk.
What has gone on the last few years is fraud on a massive scale folks. It continues to this day precisely because you, collectively, allow it.
As the economy deteriorates around you it will become more and more clear how foolish you were to sit at home or in your offices and say "oh its not going to get that bad" instead of showing up in Washington DC or your closest major city and literally shutting down commerce by "sitting in the streets" - en-masse. Yes, if you alone do this, you will be simply run over or arrested for being delusional (or suicidal), but if you and 100,000 others in your town all show up and do the same thing, reform will come and the crooks will be charged and prosecuted.
Who should eat these losses folks? Should you, the taxpayer, eat whatever is bad in the $80 billion that is sitting on Countrywide's balance sheet right now? Bank of America seems to think so, if the document referenced in The Ticker over the weekend is accurate.
Or should Mozilo eat it? Should he be forced to forfeit all of the $500 million he took out of that company in option grants over the last few years, with us calling that "a good start", then forcing the bond and stockholders of both CFC and BAC to eat the rest?
Should the bad bets that Bear Stearns made be forced to be eaten by the bond and stockholders, or should JP Morgan get a $29 billion guarantee from The Fed to "take them over", when their CEO sits on the board of the organization that yanked their funding in the first place?
Should the other investment and commercial banks be able to re-write all their bad mortgages and dump them on the government (that is, you) via Ginnie Mae and the FHA, as the bill now under debate (which looks suspiciously like BAC's "suggestion") would do, or should they be forced to eat that bad paper, without ketchup?
These games will continue until you and 9,999 of your best friends and neighbors show up in the downtown business district of the nearest major city to you and you literally shut it down by sitting down in the middle of the street and refusing to move until the crooked practices that got us into this mess result in indictments, not bailouts.
If decisive action by "we the people" does not happen soon a few trillion worth of this bad debt is going to end up on the taxpayer's balance sheet, where it will result in permanent and significant moves higher in borrowing costs for all consumer and commercial debt.
That means mortgages, credit cards, auto loans, commercial and industrial loans, and of course government loans. This transfer to "the people's" balance sheet, once done, cannot be un-done. It will mark a permanent structural change in what you pay to finance everything you buy, and the time to stop it is running out.
Lack of action is a decision, and at this juncture, one you, your children and grandchildren are going to pay for.
If you're interested in "what sort of payment might be extracted" by market forces, look at what happened with Gold and Oil this morning.
There was a monstrous spike downward in gold prices at about 7:15AM. There's no official news on what caused it, but the rumor is that there was a forced liquidation of a hedge fund. They sold their gold but held the oil.
Why is this important? Because it tends to ratify what I have been saying, which is that oil has turned into a currency. Why? Because it has utility value - it is stored energy and cannot be debased.
Bernnake and Paulson can bleat all they want about the dollar, but in the end there is exactly one thing that matters, and that is the opinion of market participants. You can't take $300 billion worth of Treasuries - money good - and exchange them for crap unmarketable paper that in fact may be worthless (nobody knows, since Ben won't let us know what's really on that balance sheet or where it came from) and expect people to believe a "trust me."
Time to choose America.
