Bond insurers' insolvency poses enormous threat to markets

[Col. Flagg]

As if the markets weren't already suffering enough from greed, fraud, credit crises, debt, the housing mess, foreclosures and everything else, this problem could dwarf them all (except for derivatives, which is a beast all by itself)...

http://www.counterpunch.org/whitney01292008.html

All you need to know...

"It is critical that sufficient capital is infused into the bond insurance industry as soon as possible. Their failure or loss of a AAA rating is a potential source of systemic risk. Probably it will be necessary to turn in part to those companies that have a stake in guarantees remaining credible because they have large holdings of guaranteed paper. It appears unlikely that repair will take place without some encouragement and involvement by financial authorities. Though there are many differences and the current problem is more complex, the Long-Term Capital Management work-out is an example of successful public sector involvement."

Some of the largest bond insurers are are currently unable to cover the losses that are piling up from the meltdown in mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Their business model is hopelessly broken and they will require an immediate $143 billion bailout to maintain operations. The largest of the bond insurers is MBIA. Here's stock analyst Michael Lewitt, quoted in Bloomberg:

"MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (eds note; pure garbage). MBIA was being priced as a weak CCC-rated credit when it issued its bonds last week; it is now being priced for a bankruptcy. MBIA's stock, which traded just under $68 per share last October, dropped another $3.50 this morning to under $10.00 per share."

Barclay's estimates that the investment banks alone are holding as much as $615 billion of structured securities guaranteed by bond insurers. If the insurers default, hundreds of billions will be lost via downgrades.

So, in practical terms, what does it mean if the bond insurers go under?
It means that the system will freeze and the stock market will crash. Listen to TV stock guru Jim Cramer summed it up last week in an interview with MSNBC's Chris Matthews:

"But, Chris, there is something I would urge all the candidates to think about and our Treasury Secretary, which is that there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points. They've got to be shut down and the insurance given to a New Resolution Trust. This is going to happen in maybe two or three weeks, Chris, it going to on the front of every newspaper and no one in Washington is even willing to admit it."

Chris Matthews: "So who are you including in these mortgage companies that are going to go belly-up; give me a description?"

"These are MBIA and Ambac. Remember the companies that Merrill Lynch and Citigroup wrote down a lot of stuff the other day? All these companies are relying on insurance to save them. The insurers don't have the money. There's also personal mortgage insurance; that's PMI, is one company; MGIC is another. Chris, I am telling you that these companies do not have the capital to "make good". And when they do fall, and I believe it is when---if the government does not have a plan in action; you will not be able to open the stock market when they collapse." No one is even talking about the fact that these major insurers, who insure $450 billion of mortgages are all about to go under."

Cramer is correct in assuming that the market won't open. And yet, so far, nothing has been done to avert the disaster just ahead. Maybe nothing can be done?

So, how did things get so bad, so fast? How could the world's most resilient, reliable and profitable markets be transformed into a carnival show peddling poisonous "mortgage-backed" snake-oil to every gullible investor?
Author and stock market soothsayer Pam Martens puts it like this

"How could a layered concoction of questionable debt pools, many of dubious origin, achieve the equivalent AAA rating as U.S. Treasury securities, backed by the full faith and credit of the U.S. government, and time-tested over a century of panics, crashes and the Great Depression?

How did a 200-year old "efficient" market model that priced its securities based on regular price discovery through transparent trading morph into an opaque manufacturing and warehousing complex of products that didn't trade or rarely traded, necessitating pricing based on statistical models?"

The answer to all these questions is "deregulation". The financial system has been handed over to scam-artists and fraudsters who've created a multi-trillion dollar inverted pyramid of shaky, hyper-inflated, subprime slop that they've sold around the world with the tacit support of the ratings agencies and the US political establishment."

WHAT A MESS!!!

[CHH]

I LOVE IT! Karma!

And by the way. I am Batman!

[shadow]

And by the way. I am Batman!

Yes, you are Batman. I remember suggesting you were him after reading all your "heroic" posts early on. When I read them it reminded me of a Seinfeld episode where Kramer fights a bad guy while driving a bus. George, after hearing this story from Kramer said "You're Batman!" That reminded me of you. So then I posed the question. "Are you Batman?" Then "BAM!!" I saw your avatar.

Sorry Col., back to the bat cave for another avatar. Maybe find a photo of Col. Flagg from MASH??

Flagg: "I've got to nip this rotten apple in the bud! This sort of action is contagious. One man decides he's not gonna fight, it catches on, the next thing, you know what you've got on your hands?"

B.J.: "Peace?"

[Col. Flagg]

And by the way. I am Batman!

Yes, you are Batman. I remember suggesting you were him after reading all your "heroic" posts early on. When I read them it reminded me of a Seinfeld episode where Kramer fights a bad guy while driving a bus. George, after hearing this story from Kramer said "You're Batman!" That reminded me of you. So then I posed the question. "Are you Batman?" Then "BAM!!" I saw your avatar.

Sorry Col., back to the bat cave for another avatar. Maybe find a photo of Col. Flagg from MASH??

Flagg: "I've got to nip this rotten apple in the bud! This sort of action is contagious. One man decides he's not gonna fight, it catches on, the next thing, you know what you've got on your hands?"

B.J.: "Peace?"

The reason I changed my avatar to Batman was because I happened to stumble across the movie 'Batman Begins' last week on FX... GREAT film! After the movie, I thought to myself that Batman epitomizes everything I want to stand for (righteousness, truth, justice, etc.) and so that is why I changed it. I've thought about using Edward Winter from MASH (the infamous 'Colonel Flagg), for an avatar, but I liked Batman better. What the heck... Col. Flagg it is! Sounds like you're a MASH fan shadow... love it! Here's one of my favorite Col. Flagg quotes:

Flagg: Okay, pipsqueak, what tipped you off?
Radar: Well, you don't look anything like you, sir, and since you're a master of disguises, I figured you were the only one who couldn't look like you that much.
Flagg: I'll buy that, for now. But if you ever cross me up, you're gonna get a Number Eight.
Radar: What's that?
Flagg: Have you ever heard of the Malaysian Chest Implosion torture?
Radar: No, sir.
Flagg: Good! 'Cause there's no such thing... yet.

Or this one (my personal favorite)...

Flagg: Don't play dumb! You're not as good at it as I am!

MASH... what a classic show!

[shadow]

When I was young my parents used to watch MASH, so be default I watched it too. Then after my mission, I did home health care and one of the old guys I took care of always had to be back in his recliner by the time MASH was on. If I was late, his shower had to wait until after MASH. The client before him was always slow, so I was usually late. I watched a lot of MASH with him, and I miss those days.

I miss meeting with all those elderly people. I learned much from spending a lot of time with them. These guys saw and lived through the great depression. To think that that will look like a picnic compared to what's in store is humbling.

I was just kidding about the Batman avatar. I really don't care, there's room enough for two. I like Superman, thus my location is the fortress of solitude! I need a big superman "S" for my avatar.

[Col. Flagg]

When I was young my parents used to watch MASH, so be default I watched it too. Then after my mission, I did home health care and one of the old guys I took care of always had to be back in his recliner by the time MASH was on. If I was late, his shower had to wait until after MASH. The client before him was always slow, so I was usually late. I watched a lot of MASH with him, and I miss those days.

I miss meeting with all those elderly people. I learned much from spending a lot of time with them. These guys saw and lived through the great depression. To think that that will look like a picnic compared to what's in store is humbling.

I was just kidding about the Batman avatar. I really don't care, there's room enough for two. I like Superman, thus my location is the fortress of solitude! I need a big superman "S" for my avatar.

I can relate to your job. Up until February of last year, I took care of respiratory distress patients in their homes and most were veterans since the company I worked for had the state VA contract. In 18 months, I put 35,000 miles on a new Chevy Express van! I'd average about 100 miles per day driving, but I miss it a little because it was just you and the beautiful Utah scenery most of the time as I treated patients from Lehi to Gunnison to Manti to Fairview (for those who live in Utah). I miss the visits as they were fun and your patients became your friends and in some cases, almost family.

Yeah, my Dad absolutely loved MASH and would watch it after the 10:00 news every night and so I started watching at about age 16 or so and became hooked because it was clever and funny at the same time, not to mention the occasional human emotion side to the stories. I'm afraid I have to agree with you... we're probably in for an awakening and financial turmoil the likes of which will dwarf the great depression in scale. The greed and fraud that has taken control of people is sad and the impact it is going to have on society may very well be unparalleled in scope. Oh, found something for you...


or this...