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Banned
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Anyone ready to change their vote in the poll? It's going to be a bumpy election year, because, "it's the economy, stupid"!
Coming to a stock market near you:
<img src="http://ichart.finance.yahoo.com/w?s=%5EN225">
The index pictured is of the Japanese stock market. Japan enjoys astrong currency, is a nation of savers, and has a robust, export dominant economy. Exactly the opposite of conditions in the US. Japan's stock index peaked near 40,000 pts., 18 years ago, and it has never recovered. Just months ago, it was <a href="http://finance.yahoo.com/q?s=%5EN225">back up above 18,000 pts</a>. Why should our market fare any better than Japan's has, especially since US fundamentals, soundness of our currency, etc., are rotten?
Quote:
http://bigpicture.typepad.com/commen...ess/index.html
ALL US indices are now down for the past 52 weeks: The Dow is off 3.7%, the Nasdaq down 4.5%, the S&P500 lost 7.4%, and the Russell 2000 down 14.3%.
Outside of treasuries, there simply was no place to hide. <a
href="http://online.barrons.com/article/SB120070162694901715.html"> Barron's Trader column</a> notes:
...."Stock benchmarks fell for a fourth straight week, putting the market on track for its worst January ever. The Dow Jones Industrial Average ended the week down 507 points, or 4%, at 12,099. It has fallen 10% in four weeks, and is 15% off its October peak. <h2>This is the Dow's worst-ever start to a year.</h2>
How afraid is Wall Street? The S&P 500 is at a 16-month low. Only 11% of its components are holding above their 50-day averages. The bond lunge has forced the yield on 10-year Treasuries to a four-and-a-half-year low near 3.6%. One question making the rounds is which benchmark is most negatively correlated to Wall Street bonuses, and thus might make a useful hedge. (The answer, courtesy of Strategas Research: There isn't a perfect hedge, but leveraged bets on gold, or selling financial stocks short might work.)"
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<h2>...And the Fed comes out today, full panic mode, but it won't help</h2>...because it is not liquidity problem, it is a solvency problem. Lower interest rates will not bail out entities with credit ratings too low now, to qualify to borrow the low interest rate money !
Quote:
http://biz.yahoo.com/ap/080122/fed_interest_rates.html
Fed Cuts Interest Rate 3/4 of a Point
Tuesday January 22, 1:03 pm ET
By Martin Crutsinger, AP Economics Writer
Federal Reserve Cuts Interest Rate Three-Quarters of a Point to Try to Head Off Recession
WASHINGTON (AP) -- The Federal Reserve unexpectedly slashed a key interest rate by a bold three-fourths of a percentage point on Tuesday, responding to a global plunge in stock markets that heightened concerns about a recession. The Fed signaled that further rate cuts were likely.
ADVERTISEMENT
The reduction in the federal funds rate from 4.25 percent down to 3.5 percent marked the biggest reduction in this target rate for overnight loans on records going back to 1990. It marked the first time that the Fed has changed rates between meetings since 2001, when the central bank was battling the combined impacts of a recession and the terrorist attacks....
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Quote:
http://www.bloomberg.com/apps/news?p...5Qo&refer=home
Default Risk Soars on Concern Over Bank Losses (Correct)
By John Glover and Hamish Risk
(Corrects amount of bank writedowns in seventh paragraph.)
Jan. 22 (Bloomberg) -- The risk of companies defaulting rose to a record on concern credit rating downgrades at bond insurers including Ambac Financial Group Inc. will cause bank losses to surge.
Credit-default swaps on the Markit CDX North America Investment-Grade Index rose 12 basis points to 122 at 7:32 a.m. in New York, according to Lehman Brothers Holdings Inc. Contracts on Bank of America Corp. jumped 7 basis points to 100.5, according to CMA Datavision. Goldman Sachs Group Inc. rose 9 basis points to 108.
``No one wants to wait to find out how it's all going to end,'' said Nigel Myer, a credit analyst at Dresdner Kleinwort in London. ``They just want to sell, preferably at last week's prices. The general reckoning is that the banks will be taking more charges.''
Banks led by Citigroup Inc. and Merrill Lynch & Co. have a net $1 trillion at risk because of contracts with insurers, according to the International Swaps and Derivatives Association. Fitch Ratings cut Ambac's top grade last week and Moody's Investors Service and Standard & Poor's are reviewing the New York-based company, along with the largest of the so- called monolines MBIA Inc., for possible downgrade.
Bank of America, the second-largest U.S. bank, said today earnings dropped 95 percent after at least $5.28 billion of mortgage-related writedowns.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
$100 Billion Loss
Financial firms have already lost more than $100 billion because of the worst U.S. housing slump for 26 years.
New York-based ACA Capital Holdings Inc., an insurer which guaranteed $26.6 billion of collateralized debt obligations backed by subprime mortgages, had its ratings cut to CCC from A by S&P in December. That prompted Merrill Lynch to announce $2.6 billion of writedowns on securities insured by the company
``The potential impact of rating agency downgrades to the monoline insurers on the banks has definitely thrown a spanner in the works for bank capital valuations,'' Merrill Lynch analysts said in a note to investors today.
CDOs are created by packaging assets including bonds, loans or credit-default swaps and using their income to pay investors. The securities are divided into different portions of varying risk, offering a range of returns.
Credit-default swaps on the Markit iTraxx Europe index of 125 investment-grade companies rose as much as 10.25 basis points to a record 92.5 today, according to JPMorgan Chase & Co. The index was 2.5 basis points higher at 84.5 at 12:33 p.m. in London.
Crossover Index
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings jumped as much as 44 basis points to 433 today, according to JPMorgan Chase & Co. It was trading at 500 at 12:33 p.m.
A basis point on a credit-default swap contract protecting 10 million euros ($14.4 million) of debt from default for five years is equivalent to 1,000 euros a year.
Spreads on investment-grade corporate debt yesterday soared 5 basis points to 134 basis points more than government debt of similar maturity, the highest since at least 1999, Merrill indexes show. Spreads on debt rated below BBB- at S&P and Baa3 at Moody's Investors Service yesterday widened 23 basis points to 651 basis points, the indexes show.
To contact the reporter on this story: Abigail Moses in London
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Quote:
http://www.dailykos.com/storyonly/20...378/144/439194
End of the line for monolines
by gjohnsit
Sat Jan 19, 2008 at 08:37:53 AM PST
Just a few days ago Merrill Lynch stunned Wall Street by reporting a net quarterly loss of nearly $10 Billion. It was the worse quarter in company history.
This much was well reported.
What didn't get nearly the attention was the largest reason for Merrill's loss. This involves a little known company called ACA Capital and a financial model on the verge of collapse.
<img src="http://photobucket.com/albums/f53/midtowng/bondinsurers.jpg">
gjohnsit's diary :: ::
Sometimes financial structures fail. For instance, the Structure Investment Vehicle (SIV) is currently in the process of vanishing forever with all the investor's money. It's architecture has been stress tested and found to be flawed.
The monoline appears to be failing its test too.
<i>Merrill reported a quarterly net loss of almost $10 billion on Thursday. Part of the hit came from $3.1 billion in credit valuation adjustments related to the firm's hedges with bond insurers, which are also known as monoline insurers.
Most of the $3.1 billion loss came from Merrill's hedges with ACA Capital, a smaller bond insurer that's struggling to survive.
The rating of ACA's bond insurance unit was slashed to CCC from A by Standard & Poor's in December because mortgage-related losses could exceed its $650 million capital cushion by more than $2 billion, the agency said.
Bond insurers agree to pay principal and interest when due in a timely manner in the event of a default. ACA has provided such guarantees on billions of securities, including more than $26 billion of collateralized debt obligations (CDOs), complex vehicles that are partly exposed to subprime mortgages.</i>
<h3>If a bond insurer gets downgraded, in theory all the securities it has guaranteed have to be downgraded too.</h3>
Financial institutions that trade in mortgage-backed securities very often buy insurance, in the same way you buy insurance for your car, to protect themselves in the event of a default by the mortgage borrowers.
The problem is that a tidal wave of mortgage defaults are sweeping the nation, creating so many losses that small bond insurers like ACA are getting swamped. As it stands, <a href="http://ftalphaville.ft.com/blog/2008/01/18/10263/will-aca-survive-the-day-and-what-about-that-61bn-cdo-exposure-if-it-doesnt/">ACA is expected to go under</a> any day now.
<imgsrc="http://photobucket.com/albums/f53/midtowng/abx.png">
Of course this means that when the bond insurer goes bankrupt all the bonds that it had insured are no longer protected, hence they are riskier. In the world of bonds, price and risk are directly and inversely proportional. Merrill's bonds go down in value the closer ACA gets to bankruptcy. Thus the huge losses.
Monolines Death Watch
So a little bond insurer went under. So what does this have to do with the price of rice in China?
The problem is that this isn't limited to just ACA. The large bond insurers are <a href="http://ftalphaville.ft.com/blog/2008/01/18/10263/will-aca-survive-the-day-and-what-about-that-61bn-cdo-exposure-if-it-doesnt/">approaching bankruptcy</a> as well.
Credit-default swaps tied to MBIA's bonds soared 10 percentage points to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.
The price implies that traders are pricing in a 71 percent chance that MBIA will default in the next five years, according to a JPMorgan Chase & Co. valuation model.
Contracts on Ambac, the second-biggest insurer, rose 12 percentage points to 27 percent upfront and 5 percent a year, prices from CMA Datavision in London show.
Ambac's implied chance of default is 73 percent, according to the JPMorgan data.
Ambac and MBIA are not small companies. The seven bond insurers are responsible for $2.4 Trillion in structured debt. Ambac alone insures $556 Billion of debt.
And speaking of Ambac, they got downgraded from AAA to AA after the market closed today. The rating agencies are also looking at cutting the ratings of MBIA next week. But like Enron, the rating agencies are way behind the market which has traded their debt as junk for months now implying "a rating of 'Caa1,' seven levels below investment grade and 14 notches below its actual rating."
``The likelihood is quite high the others will follow,'' said John Tierney, credit market strategist at Deutsche Bank AG in New York. ``Barring some significant development on new capital, it's just a matter of time before S&P and Moody's act on MBIA and Ambac.''
These downgrades mean a lot more losses are in the works for financial institutions. If all the bond insurers were to be downgraded, that would mean $200 Billion in losses for whoever holds debt that is insured by the monolines. If the monolines all go bankrupt then the losses would be much more.
To put that into perspective, total losses from the entire subprime credit cruch since August that have rocked the financial world and garnered headlines so far have only amounted to a little over $100 Billion.
That's right. The damage from the credit crunch that has worried so many people could triple in the coming weeks.
And for these struggling bond insurers, bad news can lead to more bad news. An entire financial model is on the verge of collapsing.
How it hits home
The next question you should be asking is, what sort of debt do monolines insure?
The industry guaranteed $100 billion of collateralized debt obligations linked to subprime mortgages, $22 billion of non-prime auto loans and $1.2 trillion of municipal debt.
Most local and state governments have rules that require that their municipal bonds be insured. <a href="http://news.yahoo.com/s/ap/bond_insurers">Ambac and MBIA</a> alone insure $700 Billion in muni bonds.
<i>The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY Mellon Wealth Management.</i>
With MBIA's downgrade just days away, the two main sources of muni bond insurance are about to stop new business. For local and state governments that require the bonds be insured that means no new schools will be built. No sewer systems upgraded. No bridges repaired.
And it gets even worse.
Several types of municipal issuers will be most vulnerable if they can no longer secure insurance. These are borrowers like small private schools and hospitals that are not backed by a regular tax base or revenue stream. Typically, these entities have had to secure insurance to gain credibility with the public and sell their debt.
At the very least, local and state governments will have to pay higher interest on the debt they issue. Coming at a time when the economy is entering a recession, this could put an additional strain on the budgets.
At the worst, they won't be able to sell their debt at all.
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