Bond Insurers Want $125 Billion in Liabilities Waived

How does one 'waive' a liability of this magnitude, since it is contingent upon the credit failure of the underlying instruments?

Someone must assume the loss and write it off, or at least artificially prop up the underlying security to avoid the effects of the loss. This is what the Federal Reserve is currently doing with about about 400 billion in dodgy debt for the banks.

We wonder if Ben and Timmy are thinking of getting the Federal Reserve into the insurance business with their magic money machine as well.

Are these jokers this brazen or are we just that dumb?

Bond insurers want $125bn of cover wiped out
By Aline van Duyn in New York
June 22 2008 23:30

Bond insurers such as Ambac, MBIA and FGIC are talking to banks about wiping out $125bn of insurance on risky debt securities in what could be the only way to limit the financial damage surrounding the bond insurers.

Discussions about “commuting” these insurance contracts, which were sold by bond insurers to banks in the form of credit default swaps, have taken on a renewed sense of urgency amid a rash of ratings downgrades in the bond insurance, or monoline, sector last week.

If agreements are struck about the value of these CDS contacts – and the discussions could take months – it could be significant for the entire financial system, which is clogged up by the uncertainty around the value of derivatives and complex bonds linked to mortgage-backed securities.

“If firms and their counterparties can get across the finishing line in their commutation negotiations, a shadow of uncertainty would be lifted from the monoline sector, with the prospect of better rating stability,” said Matthew Elderfield, chief executive of the Bermuda Monetary Authority, which regulates a number of bond insurers.

Bond insurers are in different stages of financial trouble, with smaller ones such as FGIC already rated in the junk category. Last week, Ambac and MBIA lost their last triple A credit ratings after Moody's downgraded them to double A and single A respectively. Both ratings have a negative outlook.

The talks centre on CDS contracts issued by bond insurers to guarantee payments on collateralised debt obligations, complex debt securities often backed by mortgages which have plunged in value amid a wave of foreclosures on mortgages issued in recent years.

The nominal value of these CDSs on CDOs is about $125bn, according to estimates by Standard & Poor's, and banks with the most exposure, such as Citibank, Merrill Lynch and UBS, have already taken writedowns related to the hedges as the credit quality of the bond insurers has deteriorated in recent months.

To commute an insurance contract, the policyholder usually receives an upfront payment in exchange for agreeing to tear up the policy.

There is little certainty about whether or not these CDSs will ever have to be paid out. In theory, bond insurers could be on the hook for billions of dollars, but it is possible that if market conditions stabilise and improve, their actual pay-outs might be low.

Banks and Brokers At Greatest Risk of Default

Default risk as indicated by the five year credit default swaps on corporate bonds from Seeking Alpha

There is an obvious shift in risk in the bonds after the Fed bailout of Bear Stearns, but the stocks are not showing a similar shift for the obvious reason that while the creditors may expect some favored treatment, shareholders obviously do not.

MBIA: Dead Man Walking

This situation with the monoline insurers is so absurd is that it would be funny were it not so serious to the real economy and so many innocent people.

What *might* save MBIA for the time being is the fact that their failure and default could trigger an extraordinary financial crisis of devaluation of private bond tranches which MBIA has insured, and might deeply impact the local government bonds market, which cuts to the heart of many concerns of US lawmakers.

All things considered, it is almost incredible that the financial system was permitted to grow into the monstrosity which it is today. Greenspan can take a huge portion of the responsibility, although Ben Bernanke is doing a great job of his short tenure so far.

Bernanke is going to have to bail out the monolines, covertly if not in the open. They are too central to the great collateralized debt ponzi scheme that is unwinding. His goal will be to keep the unwinding gracefully slow, like the 12% per year decline in the US dollar we are now experiencing, overlooked by so many to their great misfortune.

Days, weeks perhaps even a few years, its just a matter of time now. We are on the cusp of a default that will match the bubbles which spawned it.

The primary victim will be the value of the US dollar, and by extension all those who are holding it. The only question is the rate of decline.


MBIA Says It May Be Forced to Make $7.4 Billion in Payments
By Christine Richard
Bloomberg

June 21 (Bloomberg) -- MBIA Inc.'s five-level downgrade by Moody's Investors Service probably will force it to make $7.4 billion of payments and collateral postings.

MBIA has $15.2 billion of assets available to satisfy the requirements, the company said yesterday in a statement. That includes $4 billion in cash and short-term investments, $1 billion of unpledged collateral and $10.2 billion of other securities, MBIA said.

The company issued the statement in response to questions it received after Moody's yesterday reduced MBIA's insurance financial strength rating to A2 from Aaa. The company's stock dropped 13 percent yesterday after the downgrade on concern that the Armonk, New York-based company would be forced to pledge assets.

In its report downgrading the debt, Moody's said MBIA faced payments and collateral calls triggered by the reduction. MBIA this month decided against giving $900 million to its insurance unit. While that contributed to the downgrade of the subsidiary, the money now puts the parent company in a stronger position, Moody's said yesterday.

``We have more than sufficient liquid assets to meet any additional requirements arising from any terminations or collateral posting requirements,'' MBIA said in a statement earlier this week in response to the Moody's downgrade.

The payments relate to the company's guaranteed investment contracts or GICs, backed by its insurance unit, and held by municipalities.

The contracts are used by cities, states and investment securities in lieu of bank accounts. They require MBIA's holding company to post collateral against the contracts if its insurance unit's credit rating is cut as far as A2, according to company filings.

Credit-Default Swaps

Credit-default swap sellers today demanded 38.5 percent upfront and 5 percent a year to protect MBIA's insurance unit from default for five years, according to broker Phoenix Partners Group in New York. The upfront requirement rose from 31.5 percent yesterday.

Credit-default swaps, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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