Banks Anxious to Dump Debt Threaten Monolines Solvency

It looks like bad debt tends to flow downhill, from the banks to the monolines, with the facilities of the NY FED in charge of wiping up.

At the end of the day, at the end of the line, are all the holders of US dollars. If you are holding dollars, you are holding the bag. The dollar is the limit of the Fed's ability to absorb losses in the greatest transfer of wealth in modern history, from the many to the few.

A DEBT END FOR BANKS
Insurers Face Defaults
By MARK DeCAMBRE

May 27, 2008 -- Battered investment banks trying to dump billions in soured mortgage securities are being challenged by struggling insurance companies that claim such efforts could cause them further pain.

It's a battle that pits large financial firms like UBS, Merrill Lynch and Citigroup against insurers MBIA, Ambac and others. These insurers, which the industry refers to as "monolines," provide specialty insurance used to protect investors from losses on various types of debt securities.

At issue is a type of protection that banks have obtained against defaults that is now preventing them from purging portions of their holdings of arcane mortgage securities known as collateralized debt obligations.

Under the terms of this protection, the banks need approval from the monolines in order to unwind these securities - and obtaining that OK is proving difficult in some cases.

For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky.

Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.

The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses.

That has led to discussions about whether to waive claims payments in exchange for cash or warrants in certain publicly traded monoline companies.

"Clearly, liquidation into this market is tough but holding on long term might not be your best case," said Joe Messineo, who runs a New York-based structured finance consulting firm. "Not many people envisioned the magnitude of this would come down to documents."

None of the monolines embroiled in this battle returned calls for comment. Neither did the banks.

Although there are hardly any buyers for CDO paper, the banks would be able to unwind the CDOs and essentially purchase the assets that comprise the complex debt structures - a move that might allow them to better assess the value of the assets and at least eliminate the fees associated with holding onto the debt as CDOs.

mark.decambre@nypost.com

Pigs Fly, Paris Hilton Takes the Veil, and HSBC CEO Calls for Higher Rates and More Regulation

HSBC CEO calls for higher rates to fight inflation
27 May, 2008, 1714 hrs IST,
REUTERS

HONG KONG: The chief executive of Europe's biggest lender on Tuesday called on central bankers to raise interest rates in order to combat inflation, and said more regulation may be needed in the wake of the credit crunch.

Michael Geoghegan, group chief executive at London-based HSBC Holdings, also said he expects it will take three years for the bank to turn around its HSBC Finance unit in the United States.

The consumer finance business, previously called Household International, was one of the earliest casualties of the subprime mortgage meltdown in the United States.

Geoghegan said central banks were not yet committed to taming inflation, and predicted U.S. interest rates would rise after the U.S. presidential election in November.

"Inflation is a long-term problem because there is no long-term will to solve it," Geoghegan said in a speech.

In a number of economies, central banks have either cut interest rates or kept them low to support growth at a time when lending between banks has stalled and housing markets around the world have plummeted.

However, energy and food prices have surged, feeding inflation and crimping consumer spending. For example, since a flood of homeowners defaulting on their mortgages snowballed into a credit crisis last summer, U.S. consumer inflation has risen from an annual rate of 2 percent to 3.9 percent in April.

Geoghegan also said the industry's investment banking model would need to be changed over time to avoid a repeat of the past year's credit crunch.

"I'm not a great fan of regulation ... but there will be a need to look at the model in that area," he said, adding that banks should focus on lending and investment advisers on advising clients, although he did not call for any specific measures.

"The investment banking model is flawed," Geoghegan said. "If banks aren't strong, they should be restructured or taken over," he added.

HSBC, which Geoghegan said has no plans for a share buyback, has managed to weather the credit crisis that erupted last summer better than many of its peers thanks to a significant presence in emerging markets in Asia and the Middle East.

In the first quarter of this year, the lender booked a bad debt charge related to its U.S. consumer finance business of $3.2 billion, less than the $4.6 billion in the previous quarter but double the level of the first quarter in 2007.

Geoghegan, speaking to reporters following an informal shareholders' meeting in Hong Kong, declined to project any further provision to cover subprime losses, but added that 80 percent of customers in the U.S. finance unit are still paying their mortgage bills. (Wow only a 20 percent default rate? That a glass half full description - Jesse)

Earlier this month, the bank said first quarter profit was higher than a year ago despite some $5 billion in write-downs and charges related to bad debts.

HSBC, whose shares were down 0.44 percent in London trade on Tuesday after closing 0.31 percent higher in Hong Kong, is due to report its first-half results on Aug 4.

Gold, Oil, and the US Dollar

The Efficiency of Self-Regulation

This is the type of self-regulation that 'free market' true believers like Alan Greenspan argue is the most efficient and effective.

Attorneys of the class action variety take note.

Holders of this CDO and others should hit the exits in a 'free market' response. Aren't 'free markets' wonderful (after the fact)? Perhaps we can declare Manhattan south of Houston Street a 'free market zone' and have 'free streets,' free of all police presence and response. Oh, going out to lunch? Have a good day.

BlackRock CDO Seeks to Drop Fitch Rating After Downgrade Threat
By Neil Unmack

May 27 (Bloomberg) -- BlackRock Financial Management Inc., part of the largest publicly traded U.S. fund company, plans to drop Fitch Ratings from one of its collateralized debt obligations after the firm threatened to cut the deal.

BlackRock's Omega Capital unit asked bondholders to agree to ask Fitch to withdraw its ratings on its Palladium CDO II sold by BNP Paribas SA, it said in a Regulatory News Service statement. The move would leave the CDO with one rating from Standard & Poor's.

New York-based Fitch last week said it may cut Palladium's ratings by as many as four levels after it changed the way it grades CDOs pooling company debt. Fitch's review could threaten downgrades on almost half of top-rated CDOs backed by derivatives. The firm is reassessing its ratings to reflect higher default risks.

CDOs group bonds, loans or credit-default swaps, channeling the income to investors in portions of varying risk and credit ratings.

To contact the reporter on this story: Neil Unmack in London nunmack@bloomberg.net

Last Updated: May 27, 2008 07:41 EDT