It’s predictable that embattled Ambac CEO Michael Callen would claim that all is well at the bond insurer in the face of considerable evidence to the contrary in the form of first quarter net loss of $1.66 billion, which wiped out last month’s highly dilutive capital raise of $1.5 billion. Ambac had to triple its common shares last go-round to raise money that was now clearly inadequate to strengthen its balance sheet, as the rating agencies demanded.
Consider further: there is no new business for the monoliines. They’ve sworn off the securitized credit market, and with rating agencies re-doing their grading scales for municipalities, that low-risk credit arbitrage is gone.
It gets even better: Goldman predicts that Ambac and MBIA each need to raise $3.4 billion more in capital. How, pray tell, and at what cost?
Despite these rather uncomfortable facts, Callen asserts that the ratings are “solid’. Fitch doesn’t think so and already downgraded Ambac to AA. Rating agency Egan Jones doesn’t think so and has been a long-time critic of the bond guarantors. The credit default swaps market doesn’t think so. Even New York State insurance superintendent Eric Dinallo has doubts.
And the last time I recall a company saying its liquidity was fine was Bear, and at least at the time of its crunch, Bear’s long-term prospects looked better than Ambacs’ do (there is still ample debate as to whether Bear was insolvent or not: the answer in most cases depends on one’s view of the credit default swaps market).
While Lehman made similar assertions, they took some steps to assuage worries, like securing bigger bank credit lines. And Lehman was in the fortunate position of having its crisis of confidence at the time of the Bear failure. The Fed simply was not gong to let two institutions go into crisis in such close succession if there was anything it could do to prevent it.
But the old dynamic still prevails: despite widespread skepticism about the Moody’s and S&P AAA ratings on MBIA and Ambac, the two rating agencies will continue to be loath to downgrade until the evidence becomes overwhelming. So the monolines will limp along until it becomes impossible not to put them out of their misery.
So take this Bloomberg story with a handful of salt:
Ambac Financial Group Inc., the bond insurer struggling to hold on to its AAA credit rating, has no liquidity issues and the majority of its portfolio is performing well, interim Chief Executive Officer Michael Callen said.
The company’s credit ratings “are solid,” Callen said in a Bloomberg Television interview from New York today.
The world’s second-largest bond insurer, has been “very aggressive” in addressing its losses and will likely exceed ratings companies’ capital targets by May, Callen said. Ambac in March sold $1.5 billion in stock and equity units after more than $5 billion of charges on its guarantees of mortgage-liked debt.
Ambac and larger competitor MBIA Inc. may need to raise more capital, New York Insurance Department Superintendent Eric Dinallo said in a Bloomberg Television interview earlier today.
“It’s not time for a victory lap,” Dinallo said. “Mortgage losses and defaults will drive whether capital is ultimately OK.”
Goldman Sachs Group Inc. analyst James Fotheringham estimates New York-based Ambac and Armonk, New York-based MBIA may need to raise $3.4 billion each to fill capital shortfalls…..
Ambac’s March stock offering was enough to persuade Moody’s Investors Service and Standard & Poor’s to take the AAA bond insurer rating off review, averting a downgrade that would have crippled the company’s ability to guarantee bonds. It also removed the broader threat of losses for the $524 billion of municipal and asset-backed debt the company insures.
Bond insurers have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages that are now going delinquent at the highest rate since 1985. Ambac’s new business slumped 87 percent last quarter after ratings companies threatened to strip the insurer of its AAA status.
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Just a shame. A travesty. In the end the Fed may need to nationalize Ambac or subsidize a purchase by BerkshireHathaway. I think those are the most viable options. It does not change the fact that the ratings are just bogus and the business model is dead in the current form.
Re: The company’s credit ratings “are solid,” Callen said
I think his retarded statement is a syllogism:
…. a kind of logical argument in which one proposition (the conclusion) is inferred from two others (the premises) of a certain form.
However, when taken with a grain of salt, this foul thinking my just be an Affirmative conclusion from a negative premise; a logical fallacy that is committed when a categorical syllogism has a positive conclusion, but one or two negative premises.
http://en.wikipedia.org/wiki/Affirmative_conclusion_from_a_negative_premise
This is essentially a lie and false and misleading information, but under the new rules of this coup, we can can step back and look at different perspectives:
One way to demonstrate the invalidity of this argument form is with a counterexample with true premises but an obviously false conclusion. For example:
If Queen Elizabeth is an American citizen, then she is a human being.
Queen Elizabeth is not an American citizen.
Therefore, Queen Elizabeth is not a human being.
That argument is obviously bad, but arguments of the same form can sometimes seem superficially convincing, as in the following example imagined by Alan Turing in the article “Computing Machinery and Intelligence”:
If each man had a definite set of rules of conduct by which he regulated his life he would be no better than a machine. But there are no such rules, so men cannot be machines.[1]
^ Turing, Alan. “Computing Machinery and Intelligence”, Mind, New Series, Vol. 59, No. 236. (Oct. 1950), pp. 452.
>>>>We live in a world of chaotic distortion and one only an idiot would invest in!
AXP reports $100 mark on assets in Q1. The mark is n a protfolio of $1B+ but management almost laughingly assured investors that the bonds are all AAA. It really is a sad state of affairs.
The rally in financials today was os totally inorganic that it defies logic. It is the height f irony that we have the SEC going after some schlep over a rumor when the entire complex is being manipulated in ways no investr could possibley dream of. Those darn short sellers again. If only they would go away Dow 17,000 by summer.
One of my hedge fund correspondents sent a long e-mail about market manipulation, on the scale you are mentioning, broad market and broad sectors, as opposed to individual names. Even though I believe it (we’ve had way way too much weird action, like big rallies in the last 15 minutes), if I write something like that up, I risk being put in the tinfoil hat crowd.
I snipped this from calculated risk comenst but it is perfect!!!
(I didn’t look at what the cds spreads did today for LEH etc.. but a 6% plus rally one would assume they came in). Just read somewhere that coordinated CB gold sales ongoing (unconfirmed inuendo at this point). Watching action across markets is just a bit too convenient.
Ben Frank’ll Tank Bernanke writes:
Bernanke as he sits alone, ” WE are so screwed, WE are so screwed, I am so screwed!” I did everything, reflated, inflated, pushed fiscal stimulus, IB bailouts. Treasury offered super sivs, subprime lifelines, neg am certs, lender forebearance & forgiveness, congress offered relief legislation. Coordinated to stop gold runup. Cut, cut, cut rates…destroyed dollar. If I zirp we have Japan, if I don’t stock market crash and consumers turn back for good. China seething, Europe seething, US dollar holders seething. Lied about inflation, jobs, production, inventories: put all talking heads on talking points for pump-n-dump. Made new facilities, diluted future creditworthiness by taking agency & MBS with roll over loans to stoke liquidity. Pressured regulators to turn blind eye to covert balance sheet manipulations, gave IBs gilded US charter to operate as banks, invoked plunge protections to stop fast erosion of equities. Tried jamming sidelined money with inflation to get it back in investments WE need it in. Increased Fannie & Freddie caps although they are insolvent, freed cash for student loans because private side collapsed; sent out every bank crony to make approaches to dumb rich and SWF to buy derivatives/securites under ruse that they are overimpaired and chance-of-lifetime. Implicitly backed JPM/BS takedown with taxpayer. Coordinated policy with world CBs. Can’t lend direct to consumer, banks won’t lend, monetary policy Kaput.
Whats left? Give up? If I do — we crash, and have worst depression I’ve ever studied. What would uncle Milt say? What would Irving Fisher say? What would Greenspend say? wa,wa,wa. Guess I’ll just hyperinflate, monetize, and ruin everyone equally — although Wall Streeters are a little more equal than everyone. I’ll spare them in the margins. Wonder if my Dubai hideaway is ready? I want out already! B-52 ben they call me. Bah! I’d settle for a discreet Gulfstream to an insignificant, unknown particle somewhere else in the world. Maybe I could just vanish and God would put me somewhere else, somewhere less grim, in his wide (scary) universe. How great is this anguish. How exquisite the pinch. I am checkmated. Maybe I will just change all the rules, and toss board & pieces in air!
WE are so screwed, I am so screwed.
Ben Frank’ll Tank Bernanke | 04.24.08 – 10:22 pm |
Re: ” I risk being put in the tinfoil hat crowd”
Yves,
Just try it on and see how it feels (just once) I enjoy the light headed feeling and the light hearted free and naked feeling with being one with nature…
Re: Mkt manipulation:
I used to work at a vineyard many years ago and because of my experience there, selling wine, it just hit me tonight why this manipulation is so amazing:
I have been saying here and places like calculatedrisk for many months, that IMHO, The S&P500 is at least 5% overvalued (that was months ago). My Fed-like model just uses the inverse P/E of S&P to come up with a comparative yield which relates to a 10 year Treasury yield. You can use various blends of yields or aggregates but what you look for is a baseline guide as to what current valuation is relative to future value. Another way to think about that is to recall that bonds used to be long-term investments that could be parked in safety for years, as they collected dividends, a process of maturity and time…
Moving back to wine … we used to sell wine futures, i.e, the process of pre-selling wine before it matures. This mutual benefit of exchange example exists because raw wine in bulk that is unfinished and un-bottled has current value and future value.
The way we would set a market price would be to have a going rate for a finished bottle, which was basically ready to drink and then have a rate for futures. FYI, wine often ages in oak casks for maybe 1 to 3 years or more, and then this aged wine is often mixed into a large stainless steel tank and then adjusted and aged a bit longer before being put into bottles. We would sell futures by letting people try the wine from the mixing tank and if they liked it, they would pay us on the spot and then we would call them in two or three years and then we would ship them the finished wine — which by then had some nice bottle age.
The wine bought in futures form, was bought at a discount to the current bottle-aged/finished product, thus say the finished bottle has a current value of $10.00 and the bottle of future wine is sold at $7.00.
Many interesting things occur in that three year period, but mainly, the wine improves with age and increases in value, i.e, the $7.00 bottle after 3 years may now be worth $13.00, thus the person who bought the bottle 3 years ago ends up with a bottle worth $6.00 more than they paid for it. The bottle is a store of future value!
Fun example of futures, but in regard to stock manipulation and overvaluation, this example serves as a striking point, because, as the current mkt is manipulated into overvalued current value, your paying more and more for future earnings that most likely will be less and less. Thus, instead of giving you a discount today on future value, the market is increasing the price today and offering no discount at all and basically pumping up the price into a balloon.
There has been a recent mad rush for banks to explain away subprime and bring this matter to a head as fast as possible, as if trying to explain away a crop failure, or maybe sour grapes. Thus, here is the bottom line:
If the crop failed and has less value, or no value and if you write it down and call it a bad year, you still have to account for business exchanges, i.e, if a vineyard had a bad year with rotten wine, they would have to either discount the current wine and toss out the crap in the mixing tank, or increase the current price — and toss out the crap in the mixing tank.
Therefore, banks are essentially running up the price of shares today and hoping no one will notice that they don’t have any crop for next year. As an investor, or customer, speculator, you really have to scratch your head on this one and ask why you are not being offered a discount to take on a lot of risk going forward.
The disconnect between earnings mis-management today is no different than in the dotcom bubble, when virtual online startups had no earnings and nothing to show for future growth, except for hype, PR, magic tricks, infomercials, talking heads and enough people willing to jump in a bubble and buy the dream.
I think the banks fail in this pump up, because as inflation begins to have more and more of a daily impact on the cost of living, there will be fewer people playing the game. As more and more people walk away from this game, the only players left will run the realistic chance of being busted for accounting fraud and restating earnings.
The final metaphor would be to think of a vineyard selling very bad wine to as many people as they could, before they catch on. Obviously, no one that has a brain is going back to buy more overpriced crap!
Cheers
So Yves, I, too, strongly suspect market manipulation in equities—but it doesn’t bother me. Sucker’s rallies like this one, induced or otherwise, have only one end. Supposing that there is market manipulation involved it speaks to real desperation on the part of major actors, public and private. They have used every medium-cost trick in their playbooks to ease the squeeze and keep our ‘Hindenberg assets’ aloft, but they’re losing ground. This is their last, best chance to goose up our Faux Money Follies to make the waxy financials look healthy enough to attract major _private_ financial capital. I would guess real money is insufficiently nuts, only just, to fall for this stupid pet trick.
I strongly suspect we’ll get an equities market bust out of it, in May. There are several reasons both historical and in terms of macromodels (_not_ stock technicals) that I use myself, but consider this: look back over the crisis trajectory from June 07 to the present. There is a clear pattern of crisis spikes and intervening plateaus (with the latter each time proclaimed as the ‘floor’ of an ensuing recovery). That pattern is regular, it fits my models, and the next spike potential is in the first half of May. I wouldn’t call that a ‘prediction,’ but . . . .
The other theory here is that if the market is being pumped up in anticipation of a BIG decline, maybe this is a way to minimize downside damage in the near future. Maybe a 15% decline from 13,000 looks better better than a 15% decline from 10,000 — after pumping it up 2000 points. Maybe they just hope to do a little window dressing and buy some time before things crash?
I hope you everyone will bear with me. Blogger has locked my blog. This is really an indictment of what passes for technology at Google; if you look at the characteristics of spam blogs, I don’t see how they could have singled Naked Capitalism out. And they ought to have screened it against my Google ad revenues or my Feedburner traffic, both of which they can readily accessl. Or better yet, contact me.
Worse, I am speaking on a first time panel of econbloggers at the Milken Conference next week. This sort of thing never happens at a good time, but this is particularly badly timed.
If you have any ideas, aside from getting off Blogger and raising hell in Mountain View, they’d be very much appreciated.
Please keep checking back….