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Reggie Middleton

Reggie Middleton

Who am I? Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I…

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Fitch has Stripped MBIA of it's AAA Rating - The Consequences...

Here we go. It is amazing that the investment banks have rallied, particularly considering that most of them rely heavily on MBIA and Ambac as counterparties. Here is nearly all of the MBIA holdings of Morgan Stanley (many billions of dollars worth), recently downgraded: Morgan Stanley_final_040408 (1.38 MB). A comprehensive forensic deep dive, economic analysis and update of Morgan Stanely will be following shortly. Stay tuned...

  • Fitch Ratings cut MBIA Inc.'s insurance rating to AA from AAA: bond insurer short of $3.8bn capital to warrant the top ranking. Outlook negative.

  • BIS: Monoliners have written roughly $450bn of super-senior protection on CDOs in the form of CDS contracts. About $125bn of these reference ABS CDOs. Counterparties to these trades are large banks, securities firms or off-balance sheet vehicles like ABCP conduits/SIVs.

  • Fitch: As of July 2007: Industry gross insured portfolio = $2.5trillion; industry shareholder equity = $24.5bn (=leverage ratio of 100x)

  • The industry guarantees $1.2trillion municipal bonds and around $800-900bn in structured finance products. CDS portfolio is $463bn (net seller). $287bn (or 61%) of CDS written on corporate bonds; 14% on RMBS.S&P: Banks hedge about $125bn of CDOs with monoliners (senior, super-senior tranches)

  • FT Alphaville: Fitch downgrades SCA monoline bond guarantor rating from AAA to junk--> needs around $5bn to regain AAA rating. FGIC downgraded again also by S&P--> April 3: FGIC given 30 days by regulator to raise new capital to avoid worst-case scenario.

  • Tett: Some Federal Home Loan Bank (FHLB) member banks want to offer their AAA rating to municipal infrastructure projects. However, FHLB role is already being expanded for mortgage purchases and their capital is stretched already.

  • Fahey/Scott: Exposures to financial guarantors arise from:
    - CDS counterparty exposure associated with CDO, CMBS, RMBS, other ABS and corporate bond hedges;
    - Trading inventories of equity or debt of guarantors;
    - 'Wrapped' securities held in trading or investment portfolios;
    - Muni bonds wrapped in association with Tender Option Bonds (TOB) and Variable Rate Demand Obligations (VRDO) programs [i.e. off-balance sheet entitites with liquidity backstop lines]
    - Loss protection for conduits;
    - Potential support for money funds containing enhanced securities.

  • Davies: Additional risk: unwinding of negative basis trades: difference between higher bond yield and lower cost to insure (with monoliners) that same bond (usually due to oversupply of CDS)--> buying both gives positive and risk-free return usually above Treasuries.

  • Oppenheimer: Banks may write down $70bn if major monolines lose AAA

  • Egan Jones: Bond Insurers Need $200 Billion to Retain AAA

For anybody who is interested, I am making available info on several other institutions with downgraded MBIA insured inventory. This is no trivial occurrence, and in my opinion it was long overdue (for those of you who don't remember, reference my Super Scary Halloween Tale of 104 Basis Points). Below are the results of my proprietary research on broker/bank direct Ambac and MBIA counterparty exposure. This is the link to Fitch's analysis of the same (requires free registration).

1st Franklin ABS Inventory
BAC ABS Inventory
C ABS Inventory
CFC ABS Inventory (these guys were just downgraded themselves, hat tip to Paul)
CTX ABS Inventory
LEH ABS Inventory
ML ABS Inventory
Wachovia ABS Inventory
WaMu ABS Inventory
Wells Fargo ABS Inventory


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