Tough times for bond insurers.
January 23, 2008 4:17 PM Subscribe
This is definitely not a good time to be in the bond insurance business. With large-scale insurers Ambac and MBIA -- and with smaller players faring no better -- one could well think that in the end the lending crisis has brought to light considerable flaws at the very basis of the American -- and indeed global -- financial sector. (all links above except the first lead to 6-month stock charts)
The past week has been particularly difficult for all players in the bond insurance game, not just in terms of stock but in terms of core business losses. Ambac alone reported quarterly losses of $3.3B, and as past research has shown the subprime lending crisis seems likely to loom over the economy until well into the fall, which presumably means more large losses for bond insurers in the coming quarters.
Today however saw good news as New York State insurance regulator Eric Dinallo met with the heads of financial institutions and came up with a bank-funded bailout plan which greatly diminishes the insurers' costs of doing business.
Thus in one week two immediate financial crises have been not so much averted as put off for a while. The American consumer, in the short term, will not be able to keep consuming if his access to credit is reduced. And bond insurers will likely continue to see subprime-related losses well into the fall. Will 2008 be the year of bailouts?
The past week has been particularly difficult for all players in the bond insurance game, not just in terms of stock but in terms of core business losses. Ambac alone reported quarterly losses of $3.3B, and as past research has shown the subprime lending crisis seems likely to loom over the economy until well into the fall, which presumably means more large losses for bond insurers in the coming quarters.
Today however saw good news as New York State insurance regulator Eric Dinallo met with the heads of financial institutions and came up with a bank-funded bailout plan which greatly diminishes the insurers' costs of doing business.
Thus in one week two immediate financial crises have been not so much averted as put off for a while. The American consumer, in the short term, will not be able to keep consuming if his access to credit is reduced. And bond insurers will likely continue to see subprime-related losses well into the fall. Will 2008 be the year of bailouts?
It's possible that all the losses were factored into the stock price. In the past two days, Ambac is up 25% and 72%, respectively, and MBIA is up 40% and 32%, respectively. I'm not saying that Ambac and MBIA are going to see prices in the $50s anytime soon, but investors are not estimating the risks as very high this week.
posted by A-Train at 4:54 PM on January 23, 2008
posted by A-Train at 4:54 PM on January 23, 2008
That was all very interesting, thanks, I feel more informed for having read all that.
I can't help but feel that Wall Street is stuck on repeat, with those that made unethical profits off pushing products that they knew were bad for their customers walking away with a ton of money while the government foots the bill, because the consequence of letting the market handle its own problem by sinking all these huge financial institutions all at once would be worse for everyone else. How do we restore an ethical market place if the consequences never fall directly on those who manipulated the market to their unwarranted financial benefit? Is there something fundamental I'm not understanding in all this, or do a lot more people need to start going to jail every time there's a bailout in order for the players in the game to understand that you can't just operate with impunity and then stroll off once the card house collapses, leaving the mess for the government to clean up?
posted by The Straightener at 5:05 PM on January 23, 2008 [1 favorite]
I can't help but feel that Wall Street is stuck on repeat, with those that made unethical profits off pushing products that they knew were bad for their customers walking away with a ton of money while the government foots the bill, because the consequence of letting the market handle its own problem by sinking all these huge financial institutions all at once would be worse for everyone else. How do we restore an ethical market place if the consequences never fall directly on those who manipulated the market to their unwarranted financial benefit? Is there something fundamental I'm not understanding in all this, or do a lot more people need to start going to jail every time there's a bailout in order for the players in the game to understand that you can't just operate with impunity and then stroll off once the card house collapses, leaving the mess for the government to clean up?
posted by The Straightener at 5:05 PM on January 23, 2008 [1 favorite]
I posted this comment about the stock market problems worldwide and the emergency rate cuts. It relates to this, too.
What's going on with these bond insurers? Well, they wrote insurance on complex derivatives that their math geeks told them were solid. In a world where only a few of these derivatives existed, they would be, amazingly so. Unfortunately for these companies, derivatives and derivative insurance have gotten so large and so omnipresent that they have badly distorted the markets underneath. The math still works, but the math doesn't include the effects OF the math on the economy.
Markets do eventually correct, and this one is doing so with viciousness. Applying pressure to an economy makes it 'push back'; the fact that these things are happening so (relatively) quickly and with such large consequences is showing that the pressure was very strong and the maladjustments are very deep.
The models are blowing up because the models didn't take themselves into account; like most economics, they presume a fairy-tale land where everything works as it should most of the time, and where nobody else is trading derivatives.
Another way of looking at it: these bond companies took on risk, but then hedged their risk with derivatives to other entities. Because they felt safe from hedging, they took on a lot more risk than they should have. When EVERYONE is doing that, well.... we've ended up with a system that's gone rotten with risk. The financial sector has detached almost entirely from the actual economy. Their games with money suck large amounts of real wealth out of the world, while providing little in exchange. They're making you poor, remotely, and they're able to do it because of the 'Greenspan Put'... the fact that the Fed is intensely interested in keeping Wall Street solvent, no matter how ridiculously stupid they get.
Whether or not the Fed can keep the wheels on the cart, I don't know. If they can, we'll be back here again within a few years, but in a much worse way. We NEED to go through the correction, but already it's going to be incredibly bad. The politicians see 'omg people will lose their jobs!' and take steps to ensure that even MORE people will lose their jobs two or three years down the road.
Actual long-term thinking and competence is in very short supply in America of 2008.
posted by Malor at 5:10 PM on January 23, 2008 [3 favorites]
What's going on with these bond insurers? Well, they wrote insurance on complex derivatives that their math geeks told them were solid. In a world where only a few of these derivatives existed, they would be, amazingly so. Unfortunately for these companies, derivatives and derivative insurance have gotten so large and so omnipresent that they have badly distorted the markets underneath. The math still works, but the math doesn't include the effects OF the math on the economy.
Markets do eventually correct, and this one is doing so with viciousness. Applying pressure to an economy makes it 'push back'; the fact that these things are happening so (relatively) quickly and with such large consequences is showing that the pressure was very strong and the maladjustments are very deep.
The models are blowing up because the models didn't take themselves into account; like most economics, they presume a fairy-tale land where everything works as it should most of the time, and where nobody else is trading derivatives.
Another way of looking at it: these bond companies took on risk, but then hedged their risk with derivatives to other entities. Because they felt safe from hedging, they took on a lot more risk than they should have. When EVERYONE is doing that, well.... we've ended up with a system that's gone rotten with risk. The financial sector has detached almost entirely from the actual economy. Their games with money suck large amounts of real wealth out of the world, while providing little in exchange. They're making you poor, remotely, and they're able to do it because of the 'Greenspan Put'... the fact that the Fed is intensely interested in keeping Wall Street solvent, no matter how ridiculously stupid they get.
Whether or not the Fed can keep the wheels on the cart, I don't know. If they can, we'll be back here again within a few years, but in a much worse way. We NEED to go through the correction, but already it's going to be incredibly bad. The politicians see 'omg people will lose their jobs!' and take steps to ensure that even MORE people will lose their jobs two or three years down the road.
Actual long-term thinking and competence is in very short supply in America of 2008.
posted by Malor at 5:10 PM on January 23, 2008 [3 favorites]
I'm reminded of the ''opinions are like assholes, everyone's got one' adage.
posted by sfts2 at 5:20 PM on January 23, 2008
posted by sfts2 at 5:20 PM on January 23, 2008
Barron's this weekend suggested that the market did not quite understand the numbers behind MBIA, and given its performance these past two days, I have to think they convinced a bunch of readers. How far this can go is more than I know. They report their earnings tomorrow.
posted by IndigoJones at 5:34 PM on January 23, 2008
posted by IndigoJones at 5:34 PM on January 23, 2008
The models are blowing up because the models didn't take themselves into account;
How could you possibly know that? I mean, it seems like making a statement like that would require a pretty in-depth understanding of mathematics. Do you have a degree in math?
posted by delmoi at 5:51 PM on January 23, 2008
How could you possibly know that? I mean, it seems like making a statement like that would require a pretty in-depth understanding of mathematics. Do you have a degree in math?
posted by delmoi at 5:51 PM on January 23, 2008
Malor writes "The models are blowing up because the models didn't take themselves into account; like most economics, they presume a fairy-tale land where everything works as it should most of the time, and where nobody else is trading derivatives. "
I'd like to correct that statements as it suggests that rational models are pure fantasy, like flying Spaghetti Monster and you know who. That is NOT the case ; any model is a tentative and necessarily incomplete representation of something "other" . Yet I concur that economic models don't necessarily describe accurately reality. Take the perfect competition model : it may have been and still is "sold as" the "one and only way" a market work or should work, but that is definitely not the case !
Anybody taking their time to study perfect competition models understands , even after a cursory glance, that the PCM is the model of an hypothetical market. The attempt to implement this model in reality is a rather risky one, because it necessarily ignores a number of not analyzed and understood problems , but that is done in the name of attempting to obtain a so called "second best optimum" , which in layman term means : you can't have the $1000 you want (it's ideal) , but what if we achieve $900, wouldn't you try or it's all or nothing ? Some people in key positions think perfect competition is an interesting model, and they apparently are applying some "light" version of it, as they deem to use State bailout and interventions, which is the negation of a self-sufficient market. But "friends" have to be bailed out, don't they ? That's my suspect.
I also concur on the hypothesis that a model doesn't necessarily predict its own effect, or all of its effect once it's applied. But human processes are trial-and-error process, understanding by our own failures ; it's pretty safe to just stay put and try nothing to solve a problem, I guess it's the definition of conservatism. So application of a model is in itself an experiment, possibily a risky one too.
The problem is that the shortcoming of a model and its errors can be profiteable, very much so, take for instance people betting on market crash. If this "error" is profiteable to the restricted number of persons that have noticeable influence on economies, they will have little incentive to fix it or may not even bother to check out what is wrong, or may just not have any idea. Why fix the model, if it doesn't sink my ship ? The pressure should come from who's being affected and aware that a model or some models are part of the problem.
It's also pretty much convenient to "blame the economist geeks" ; while there are certainly economist to blame for the excessive abstraction of their theories, I'd also look at the people who decided to implement these policies, who seldom are the economists themselves. Indeed if we don't live in a vacuum, we shouldn't ignore the fact that the most important decisions are rarely taken by just one person.
posted by elpapacito at 5:58 PM on January 23, 2008
I'd like to correct that statements as it suggests that rational models are pure fantasy, like flying Spaghetti Monster and you know who. That is NOT the case ; any model is a tentative and necessarily incomplete representation of something "other" . Yet I concur that economic models don't necessarily describe accurately reality. Take the perfect competition model : it may have been and still is "sold as" the "one and only way" a market work or should work, but that is definitely not the case !
Anybody taking their time to study perfect competition models understands , even after a cursory glance, that the PCM is the model of an hypothetical market. The attempt to implement this model in reality is a rather risky one, because it necessarily ignores a number of not analyzed and understood problems , but that is done in the name of attempting to obtain a so called "second best optimum" , which in layman term means : you can't have the $1000 you want (it's ideal) , but what if we achieve $900, wouldn't you try or it's all or nothing ? Some people in key positions think perfect competition is an interesting model, and they apparently are applying some "light" version of it, as they deem to use State bailout and interventions, which is the negation of a self-sufficient market. But "friends" have to be bailed out, don't they ? That's my suspect.
I also concur on the hypothesis that a model doesn't necessarily predict its own effect, or all of its effect once it's applied. But human processes are trial-and-error process, understanding by our own failures ; it's pretty safe to just stay put and try nothing to solve a problem, I guess it's the definition of conservatism. So application of a model is in itself an experiment, possibily a risky one too.
The problem is that the shortcoming of a model and its errors can be profiteable, very much so, take for instance people betting on market crash. If this "error" is profiteable to the restricted number of persons that have noticeable influence on economies, they will have little incentive to fix it or may not even bother to check out what is wrong, or may just not have any idea. Why fix the model, if it doesn't sink my ship ? The pressure should come from who's being affected and aware that a model or some models are part of the problem.
It's also pretty much convenient to "blame the economist geeks" ; while there are certainly economist to blame for the excessive abstraction of their theories, I'd also look at the people who decided to implement these policies, who seldom are the economists themselves. Indeed if we don't live in a vacuum, we shouldn't ignore the fact that the most important decisions are rarely taken by just one person.
posted by elpapacito at 5:58 PM on January 23, 2008
It's not that bad a time to be a bond insurer, it just depends on the bonds. Warren Buffet and Berkshire Hathaway announced recently they're jumping into the game in NY and Cali and hope to eventually expand to more states. Buffet has stated that they're not going to get dragged down into CDO's (instead they're focusing on insuring municipal bonds), and they happen to have a few billion lying around, so it looks like a great opportunity to them. What this post should say is that it's a bad time to be a bond insurer who's insuring the sub-prime mess.
posted by Crash at 5:59 PM on January 23, 2008
posted by Crash at 5:59 PM on January 23, 2008
How could you possibly know that? I mean, it seems like making a statement like that would require a pretty in-depth understanding of mathematics. Do you have a degree in math?
I don't need one, delmoi. No system can model both another system and itself, if it's in that same system, accurately. It doesn't matter how the modeling is done, a thing of X complexity can't simulate another thing plus X accurately.
posted by Malor at 6:09 PM on January 23, 2008
I don't need one, delmoi. No system can model both another system and itself, if it's in that same system, accurately. It doesn't matter how the modeling is done, a thing of X complexity can't simulate another thing plus X accurately.
posted by Malor at 6:09 PM on January 23, 2008
Buffett's got a healthy fear of derivatives (he's called them financial weapons of mass destruction, in fact), but typical municipal bonds are fairly simple things, and I suspect he'll be a strong stabilizing force in those markets. That's good news.
posted by Malor at 6:12 PM on January 23, 2008
posted by Malor at 6:12 PM on January 23, 2008
It's possible that all the losses were factored into the stock price. In the past two days, Ambac is up 25% and 72%, respectively, and MBIA is up 40% and 32%, respectively. I'm not saying that Ambac and MBIA are going to see prices in the $50s anytime soon, but investors are not estimating the risks as very high this week.
posted by A-Train at 7:54 PM on January 23 [+] [
it's because there's going to be a bailout: congrats you've just volunteered to help these poor fellows out. Mighty kind of ye, you taxpayer.
posted by geos at 6:28 PM on January 23, 2008
posted by A-Train at 7:54 PM on January 23 [+] [
it's because there's going to be a bailout: congrats you've just volunteered to help these poor fellows out. Mighty kind of ye, you taxpayer.
posted by geos at 6:28 PM on January 23, 2008
"How do we restore an ethical market place if the consequences never fall directly on those who manipulated the market to their unwarranted financial benefit?"
All the warrentless wiretapping, spyware, your every move tracked, videoed and traceable, yet somehow we just can't figure out precisely who did the bilking. They will get away with it, though, won't they? One can always hope for poetic justice, like catching a deadly disease from a formerly middle class homeless person.
posted by AppleSeed at 6:29 PM on January 23, 2008
All the warrentless wiretapping, spyware, your every move tracked, videoed and traceable, yet somehow we just can't figure out precisely who did the bilking. They will get away with it, though, won't they? One can always hope for poetic justice, like catching a deadly disease from a formerly middle class homeless person.
posted by AppleSeed at 6:29 PM on January 23, 2008
The secret about money is that there isn't any. If I've got a dollar in my pocket it's because somebody owes somebody a dollar someplace else.
In the last thirty years, our economy has run on the anhilation of money and antimoney, just like matter and antimatter. People don't make enough money to go to school, to own houses, or get healthcare, never mind buy the things that are incessantly advertised on television. It doesn't matter because they've got credit.
Back in the 1970's, excess credit pushed up prices and wages. Reagan brought us the "globalization" attacked by activists circa 2000... A regime that took power from workers and gave it to investors. Excess money now puffs up asset prices... An increase in the price/earnings ratio of a stock is inflation just as much as an increase of ground beef, but people think it's a good thing, not a bad thing.
Perhaps it's self defeating, but I keep my money under a mattress. I don't trust Wall Street with it -- they'll just lose it and devastate communities in the US and other countries in the process.
posted by devonianfarm at 7:47 PM on January 23, 2008
In the last thirty years, our economy has run on the anhilation of money and antimoney, just like matter and antimatter. People don't make enough money to go to school, to own houses, or get healthcare, never mind buy the things that are incessantly advertised on television. It doesn't matter because they've got credit.
Back in the 1970's, excess credit pushed up prices and wages. Reagan brought us the "globalization" attacked by activists circa 2000... A regime that took power from workers and gave it to investors. Excess money now puffs up asset prices... An increase in the price/earnings ratio of a stock is inflation just as much as an increase of ground beef, but people think it's a good thing, not a bad thing.
Perhaps it's self defeating, but I keep my money under a mattress. I don't trust Wall Street with it -- they'll just lose it and devastate communities in the US and other countries in the process.
posted by devonianfarm at 7:47 PM on January 23, 2008
Wow, the invisible hand may decide to bail out the bond insurers as well as do an emergency rate cut. Amazing how this free market thingee works.
posted by ryoshu at 10:03 PM on January 23, 2008 [3 favorites]
posted by ryoshu at 10:03 PM on January 23, 2008 [3 favorites]
Lies, if Warren Buffett is in it, its worth looking at.
posted by OldReliable at 5:21 AM on January 24, 2008
posted by OldReliable at 5:21 AM on January 24, 2008
So from what I've read, the new re-lowering of the interest rates has lead to more people trying to refinance homes (and now the gov may help people with loans up to $600,000+), looking like they're trying to repeat what happened in 01-04 except with less credit available.
posted by drezdn at 6:26 AM on January 24, 2008
posted by drezdn at 6:26 AM on January 24, 2008
drezdn: in order to get out of this hole we must dig even faster.
posted by MillMan at 5:10 PM on January 24, 2008
posted by MillMan at 5:10 PM on January 24, 2008
The $600/$1200 tax refund plan applies to my previous comment as well. Borrowing another $150 billion from the Chinese...brilliant.
posted by MillMan at 5:12 PM on January 24, 2008
posted by MillMan at 5:12 PM on January 24, 2008
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