This mornings must read article is via the NYT’s Gretchen Morgenson and Vikas Bajaj on Credit Default Swaps: MBIA Debt Is Setting Up a Quandary.
Here’s the Ubiq-cerpt:™
"The risks associated with the vast, unregulated market for credit default swaps played a crucial role in the bailout of Bear Stearns. Now these financial instruments are taking center stage in another Wall Street drama: whether regulators will let MBIA, the big bond insurance company, renege on a promise to shore up a crucial unit with $900 million in capital.
MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health. Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.
But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.
In the case of Bear Stearns, the Federal Reserve feared that credit default swaps might unleash a chain reaction of losses if the bank were allowed to collapse. Given the threat that similar swaps may pose to MBIA, Mr. Dinallo is unlikely to push for a regulatory takeover of the subsidiary even if Joseph W. Brown, MBIA’s chief executive, refuses to recapitalize the unit."
Its a variation of the old joke, writ much much larger: If you owe the bank $100 dollars, its your problem — but if you insure/underwrite $137 billion in swaps that you cannot possibly make good on, well then, its the Bank’s problem — or in this case, the Federal Reserve’s and the New York State insurance department concern . . .
>
UPDATE 2: June 19, 2008 5:59am
MBIA seems to be playing fast and loose with the truth in responding to the NYT
MBIA Lies in Attack on New York Times
Yves Smith
JUNE 19, 2008, 5:10 AM
http://www.nakedcapitalism.com/2008/06/mbia-lies-in-attacks-on-new-york-times.html
UPDATE: June 18, 2008 3:47pm
See this WSJ article for more on a related issue:
More than a year after the first stirrings of the credit crunch, the financial community is still short on trust.
Soon, there may be a market to trade on exactly how
short, as credit-market aficionados look to exploit the pervasiveness
of counterparty risk in a still-fragile investment climate.Counterparty risk refers to the possibility that a
trading partner runs into trouble and is unable to fulfill the
obligations on its derivatives contracts. Given the billions of dollars
of write-downs at major banks and brokers, as well as the enormous size
— $62 trillion — of the over-the-counter derivatives market, such
risk isn’t taken lightly by financial markets still concerned that the
credit crunch isn’t over. —WSJ
>
Source:
MBIA Debt Is Setting Up a Quandary
GRETCHEN MORGENSON and VIKAS BAJAJ
NYT, June 18, 2008
http://www.nytimes.com/2008/06/18/business/18bond.html
~~~
Do you think he was sitting in his office with his thumb on his nose going nana-nana boo-boo to Dinallo?
When is government going to learn that they can’t mess with business?
Will Damien Hurst please put the monoline’s management in formaldehyde, already? The “piece” will be worth much more than any “equity” MBIA may fetch in liquidation.
…would look good in Pershing Square’s foyer
I know you detest and ignore ‘assignments’ but this posting raises a bigger question.
“How do so many idiots and/or idiotic ideas find their way to Wall Street and why do people throw money at them?”
I can come up with my own theories of Stupid, but I don’t have access to the monied set and, thus, can’t get close enough to see what makes them tick. Is Wall Street a psychopath magnet, in which few rules and dubious accountability creates a playground for the predators among us? Is it acute narcissism and the vicious need to push personal pet ideas onto the rest of us, doubling down as required?
Thieves and the insane will always be among us, and many have pleasant and attractive personalities. But why do people give them money when they are so obviously just promoting themselves and their need for money and influence?
I don’t disagree with anything here, but wanted to comment on the $137bn of swaps that have been written. This is I believe a notional number, hence not representative of risk…while $137bn exposure is certainly sporting, that number itself is not at risk but the market to market losses associated with a position of that size- this could be easily several billion however and perhaps into the $10’s of billions in extremis, but the real risk here appears not with the underlying default entity’s solvency but the paper’s holder..hence there’s a chance that even if unable to meet loss obligations in the event of credit defaults MBIA could skate by and get lucky if the portfolio of CDS’s written is diverse enough…this may be a presumptious proposition however as it is likely the case that such protection is concentrated following existing lines of business. Additionally I would imagine that MBIA is a net buyer of CDS premium as they hedge their underlying book…the real risk here (and I am sadly ignorant about this though hopefully someone better informed will be able to elaborate) is that MBIA not only sold protection via normal business premiums but also branched out into the cds space and effectively “doubled down” instead of hedged…
Ed.
Why do supposedly informed people still call it “the bailout of Bear Stearns”? The FED engineered a raid on Bear for the benefit of JPM!
Lies, lies, and more damned lies. Are there still people out here who don’t know that wall street is the original den of theives?
One big problem is that none of these people fear any consequences. Those who are punished for their frauds are few and far between. Too bad Spitzer didn’t stay attorney general and keep his pants on.
Plus, the American people have become fat and intellectually lazy, and are only too eager to be led by anyone who claims superior knowledge, whether it be in finance, health, lifestyle or national security. The evidence is all around us from the current financial debacles, to the plethora of self-help books by “experts”, to the power of Oprah, to the failed “war on terror” which has relied on the blind faith of the citizenry, to the real chance of electing a president who has no experience or accomplishments, but who does have the word “change” on the podium when he speaks.
BTW, the FT has a brief listing of some new signs on the road to perdition:
http://ftalphaville.ft.com/blog/2008/06/18/13861/structured-credit-watch/?source=rss
cinefoz…..
I know you detest and ignore ‘assignments’ but this posting raises a bigger question.
“How do so many idiots and/or idiotic ideas find their way to Wall Street and why do people throw money at them?”
(GREED). Greed is idiotic by its nature. It is also self-destructive. They are not idiots.. They are just lazy and don’t want to make a real living. They are those wonderful ‘personalities’ in highschool w/o an ounce of intelligence but a lot of ‘drive’.
I can come up with my own theories of Stupid, but I don’t have access to the monied set and, thus, can’t get close enough to see what makes them tick. Is Wall Street a psychopath magnet, in which few rules and dubious accountability creates a playground for the predators among us? Is it acute narcissism and the vicious need to push personal pet ideas onto the rest of us, doubling down as required?
What makes them tick? Money and more money…Power, domination, a need/desire to be on top of the world… I know a few. Remove the ‘?’ marks and you have you answer… I believe in ‘investing’ and I believe in ‘risk’. However, wallstreet has for long been a place where neither of these concepts exists. It is more about gambling and lies…. I had it in me to ‘invest’ for some time. However, after digging deep into how modern markets really work and how wallstreet really works, I figured no matter how much money I could make.. It wouldn’t be worth my time/effort. I have about $27k (yeah, so I can day-trade – enter/exit when I want) sitting in my trade account that I haven’t touched for ~3months… Deciding soon to possibly take it out. I decided to study magnetism and other things instead. Wallstreet is like a big gambling house where most of the games are rigged. I fancy a quick gamble every now and then but it by far isn’t my life pursuit.. You see, I like to contribute something of substance from my labors/efforts….
Thieves and the insane will always be among us, and many have pleasant and attractive personalities. But why do people give them money when they are so obviously just promoting themselves and their need for money and influence?
Simple… Because we have been systematically forced to…. Because your average person doesn’t make enough to live a decent middle class life by going to school and contributing to society? …
If you take a step back and look at society it is common occurrence of the case by which large amounts of people give money to a small amount (endorse division)… These people then marvel and aspire to be this rich person they have endorsed even though it is (largely) not possible given the math. The rich person then envies the common people for the substance they have in their lives… The rich person then substantiates their richness often by flaunting its capabilities and causing commoners to envy him/her… They then thus ‘logically’ include their lives and lifestyle must be very valuable since soo many people want it.
It’s a hilarious social phenomenon. Corporations/media stroke this engine by playing both sides for profit… (rinse and repeat). Over the last couple of decades there has been an increase in ‘competition’ if you may describe it by which the height of ‘achievement’ and ‘possession’ has been pushed up a great deal.. This increases work output from the ‘workers’ and increase consumption.. Competition however is relative.. But the population is too dumb to realize it and popular culture to strong against this stupidity to be pushed back down.
I can go on and on for days. However, I am sure you all know/realize this.. Most have concluded… Everyone else is doing it so why shouldn’t I (heard mentality). This is a phenomenon present all throughout natural. In most cases, once enough people pile on a certain idea it eventually crumbles in on all of them under the sheer weight. (boom/bust) anyone?.. For their is a thing called (balance) and it is always reached.
We as human beings are short term wired and only a few of us have through intellectual and psychological pursuits adjusted ourselves to think more long term.
For these, life is not observed as short term discontinuous functions but a connected series of progressions whose long run results generally can predicted by the initial conditions.. Think of a fractal, base unit, and seed…
Wallstreet is very much aware of these and it is generally ‘baked’ into stock price movements… A lot of stuff is ‘baked’ in.. However, as a whole wallstreet is just a big playground/game. A iterative run of winners/losers with most participants thinking they will be winners. With all participants generally unaware of the consequences to non-participants of this gamed. Greed and stupidity are at the heart of wallstreet… It appeals to the lesser natures of us as human beings.. Thus, it will always be illogical, corrupt, and filled with ‘players’ ;).
cinefoz…..
I know you detest and ignore ‘assignments’ but this posting raises a bigger question.
“How do so many idiots and/or idiotic ideas find their way to Wall Street and why do people throw money at them?”
(GREED). Greed is idiotic by its nature. It is also self-destructive. They are not idiots.. They are just lazy and don’t want to make a real living. They are those wonderful ‘personalities’ in highschool w/o an ounce of intelligence but a lot of ‘drive’.
I can come up with my own theories of Stupid, but I don’t have access to the monied set and, thus, can’t get close enough to see what makes them tick. Is Wall Street a psychopath magnet, in which few rules and dubious accountability creates a playground for the predators among us? Is it acute narcissism and the vicious need to push personal pet ideas onto the rest of us, doubling down as required?
What makes them tick? Money and more money…Power, domination, a need/desire to be on top of the world… I know a few. Remove the ‘?’ marks and you have you answer… I believe in ‘investing’ and I believe in ‘risk’. However, wallstreet has for long been a place where neither of these concepts exists. It is more about gambling and lies…. I had it in me to ‘invest’ for some time. However, after digging deep into how modern markets really work and how wallstreet really works, I figured no matter how much money I could make.. It wouldn’t be worth my time/effort. I have about $27k (yeah, so I can day-trade – enter/exit when I want) sitting in my trade account that I haven’t touched for ~3months… Deciding soon to possibly take it out. I decided to study magnetism and other things instead. Wallstreet is like a big gambling house where most of the games are rigged. I fancy a quick gamble every now and then but it by far isn’t my life pursuit.. You see, I like to contribute something of substance from my labors/efforts….
Thieves and the insane will always be among us, and many have pleasant and attractive personalities. But why do people give them money when they are so obviously just promoting themselves and their need for money and influence?
Simple… Because we have been systematically forced to…. Because your average person doesn’t make enough to live a decent middle class life by going to school and contributing to society? …
If you take a step back and look at society it is common occurrence of the case by which large amounts of people give money to a small amount (endorse division)… These people then marvel and aspire to be this rich person they have endorsed even though it is (largely) not possible given the math. The rich person then envies the common people for the substance they have in their lives… The rich person then substantiates their richness often by flaunting its capabilities and causing commoners to envy him/her… They then thus ‘logically’ include their lives and lifestyle must be very valuable since soo many people want it.
It’s a hilarious social phenomenon. Corporations/media stroke this engine by playing both sides for profit… (rinse and repeat). Over the last couple of decades there has been an increase in ‘competition’ if you may describe it by which the height of ‘achievement’ and ‘possession’ has been pushed up a great deal.. This increases work output from the ‘workers’ and increase consumption.. Competition however is relative.. But the population is too dumb to realize it and popular culture to strong against this stupidity to be pushed back down.
I can go on and on for days. However, I am sure you all know/realize this.. Most have concluded… Everyone else is doing it so why shouldn’t I (heard mentality). This is a phenomenon present all throughout natural. In most cases, once enough people pile on a certain idea it eventually crumbles in on all of them under the sheer weight. (boom/bust) anyone?.. For their is a thing called (balance) and it is always reached.
We as human beings are short term wired and only a few of us have through intellectual and psychological pursuits adjusted ourselves to think more long term.
For these, life is not observed as short term discontinuous functions but a connected series of progressions whose long run results generally can predicted by the initial conditions.. Think of a fractal, base unit, and seed…
Wallstreet is very much aware of these and it is generally ‘baked’ into stock price movements… A lot of stuff is ‘baked’ in.. However, as a whole wallstreet is just a big playground/game. A iterative run of winners/losers with most participants thinking they will be winners. With all participants generally unaware of the consequences to non-participants of this gamed. Greed and stupidity are at the heart of wallstreet… It appeals to the lesser natures of us as human beings.. Thus, it will always be illogical, corrupt, and filled with ‘players’ ;).
In light of this news is, really, the bigger story…
The bank for the British Empire’s Royal Family — RBS — saying that, if it walks like a duck and it quacks like a duck, then everything is about to get real fupped duck.
And when money talks, you know what walks…