US Dollar Long Term Chart with Commitments of Traders as of June 24

US Dollar Long Term Chart in Babson Style with COT



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MBIA On the Edge of a Cliff

MBIA Position `Tenuous' After Moody's Downgrade, Fitch Says
By Christine Richard
June 27, 2008 12:55 EDT

June 27 (Bloomberg) -- MBIA Inc. faces a ``tenuous situation'' as the bond insurer seeks to cover payments and collateral calls on $7.4 billion of securities triggered by a credit-rating downgrade, Fitch Ratings analyst Thomas Abruzzo said.

MBIA may need to tap assets pledged to back other commitments as it comes up with the money, potentially opening the company up for further downgrades, said Abruzzo, who yesterday withdrew his rating on MBIA and Ambac Financial Group Inc. after the companies refused to give him information.

MBIA, based in Armonk, New York, is being forced to post collateral and make payments to some investors after Moody's Investors Service cut its insurance rating five levels to A2 from Aaa last week. Some of that money may come from assets backing an $8.1 billion medium-term note program, potentially creating a new liability for MBIA's insurance company, Abruzzo said. MBIA may be forced to sell some securities at a loss to fund the collateral payments, he said.

``It exposes the company to event and market risk,'' Abruzzo said in a telephone interview. Abruzzo cut MBIA to AA from AAA in April. ``It wasn't something that was envisioned when the company was AAA with a stable outlook.''

Jim McCarthy, a spokesman for MBIA, said he didn't have an immediate comment.

``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 last week in response to the Moody's downgrade.

Global Funding

In addition to its main business of insuring bonds, MBIA also manages assets for clients such as municipalities.

The asset management unit issued guaranteed investment contracts and medium-term notes, which carried AAA ratings because they were backed by the company's insurance unit, according to company filings. The unit makes a profit by investing in lower-rated securities that have higher yields, filings show. The downgrade of the insurance subsidiary triggered provisions in the investment contracts requiring MBIA to post collateral or repay investors, who include cities and states.

The asset management unit has $15.2 billion ``available to satisfy'' the demands, the bond insurer said in its statement. Those assets, though, also back the medium-term note program run by MBIA Global Funding LLC, the filings show. Taking $7.4 billion as collateral and cash payments would leave $7.8 billion to back the $8.1 billion program, a gap of $300 million that could widen if assets are sold at a loss, Abruzzo said.

``It's a concern that the liquidity in the asset management business has been further encumbered,'' Abruzzo said. ``It's a bit like robbing Peter to pay Paul. Ultimately, the insurance company is on the hook for any shortfalls.''

`Volatile' Credit

Abruzzo said he withdrew all his ratings on MBIA and Ambac because the companies refused to provide him private information, making it impossible for him to accurately rate them. MBIA said Fitch directly rated only about 30 percent of its portfolio so couldn't produce accurate assessments of its potential writedowns.

The recent downgrades ``impact the companies' business prospects and the companies' reactive strategic and capital management planning creates a volatile credit variable,'' Abruzzo said in the report.

Should MBIA's ratings fall to BBB or lower, the guaranteed investment contracts terminate and MBIA would be forced to repay holders.

Standard & Poor's, which cut MBIA's insurance unit to AA from AAA on June 5 and is reviewing it for another downgrade, isn't concerned about the holding company's liquidity, David Veno, an S&P analyst said in an e-mailed statement.

Even if MBIA is required to sell assets, Veno said he's not concerned ``given the apparent strong quality of the investments.''

Moody's spokesman Abbas Qasim said no one was available to comment.

Regulators

At the end of the first quarter, 48 percent of the assets backing the medium-term notes and investment contracts were invested in corporate bonds, 11 percent in asset-backed securities and 8 percent in non-agency residential mortgage backed securities, according to an MBIA presentation on May 12. About 20 percent of the assets were insured by MBIA or another bond insurance company, also according to the presentation.

The New York State Insurance Department is also monitoring the possibility of a claim on the insurance unit to make up a shortfall in the medium-term note program, Deputy Superintendent Michael Moriarty, said in an e-mailed statement.

Further ratings cuts or a slowing economy which ``may adversely impact the investment portfolio, could stress the asset-liability match of MBIA's investment management business,'' Moriarty said.

MBIA has an additional $1.4 billion of cash at the holding company that could be used to cover shortfalls, the company said last week. That includes $900 million it decided against giving to its insurance unit to shore up its capital after Moody's said it was likely to downgrade the insurer regardless.

Significant Deterioration in Alt-A Mortgage Debt Performance

It might be time to check what debt categories are being held by your money market funds if you have not done so lately.

How secure is that $1.00 NAV?

You should know what they are holding if you have any significant amounts parked in them. We have become complacent while the regulatory process in the US was functioning relatively effectively, even though we might not have realized it.

It was deteriorating under Clinton and became virtually ineffective under Bush II.

Alt-A Performance Gets Much Worse in May
By PAUL JACKSON
June 26, 2008
Housingwire.com

Problems are continuing to grow sharply among Alt-A borrowers, despite a dearth of pending rate resets, underscoring just how much home price depreciation is affecting borrowers in key housing markets nationwide.

A new report released by Clayton Fixed Income Services, Inc. on Wednesday afternoon found that 60+ day delinquency percentages and roll rates increased in every vintage during May among Alt-A loans, while cure rates have declined only for 2003 and 2007 vintages.

The picture being painted for Alt-A is increasingly beginning to look a whole lot like subprime, as a result, even if peaking resets in the loan class aren’t expected until the middle of next year. In particular, loss severity continues to ratchet upward — a trend that portends some likely further reassessment of rating models at each of the major credit rating agencies, as they catch up with the data.

Loss severity — the average amount lost relative to unpaid principal balance — reached 41.4 percent for all Alt-A first liens in REO during the most recent rolling six month period through May, Clayton said; that was up from a 37.6 percent rolling average one month earlier, and compares to a similar 49 percent loss severity average for subprime first liens liquidated in REO through May.

Those numbers make Standard & Poor’s Ratings Services latest assumption of 35 percent loss severity on Alt-A loans, only one month old, already start to look a little too conservative. The rating agency’s updated loss severity assumption was one key reason the agency cut ratings of 1,326 Alt-A residential mortgage-backed securities in late May — and put another 567 AAA-rated tranches on negative ratings watch.

We’d speculated in May that S&P’s loss assumptions were yet too conservative; given the data now available, a ratings cut for any AAA classes deemed at risk one month ago would seem to be a foregone conclusion for most investors.

Add in soaring borrower defaults, and the picture doesn’t get much better. Clayton reported that the 2006 vintage saw 60+ day borrower deliquencies among Alt-A first liens reach 21.22 percent in May, up 10.5 percent in a single month; 2007 fared even worse, with 60+ day delinquencies ratcheting up 22 percent to 18.55 percent.

Even the 2004 Alt-A vintage, what’s left of it, is defaulting at a fast pace: 60+ day delinquencies in the vintage shot up by nearly 24 percent in just one month.

The problem isn’t rate resets of adjustable-rate mortgages, either, a point we’ve been hammering for some time. Rather, rapidly falling home prices and a weakening economy are the chief culprits here.

“Amid all the attention being paid to rate adjustments, however, it’s important to note that out of all the active delinquent ARM loans in Clayton’s portfolio, approximately 70 percent were already delinquent prior to the first rate change date,” analysts at the firm noted in their report.

Off Balance Sheet Antics Hit the Insurance Giant AIG

The Cat: By-the-bye, what became of the baby? I'd nearly forgotten to ask.
Alice: It turned into a pig.
The Cat: I thought it would.

This is provided as background to help you understand why the Net Asset Value of your uninsured money market funds takes a healthy single digit hit in the near future.

By the way, AIG used to speculate in the silver markets and was one of the short seller cartel. Wait until that anti-bubble blows up.

AIG Poised to Absorb $5 Billion Losses From Securities-Lending
By Miles Weiss

June 27 (Bloomberg) -- American International Group Inc. plans to absorb losses for a dozen insurance units after their securities-lending accounts suffered $13 billion of writedowns tied to the subprime-mortgage collapse during the past year.

The world's largest insurer will assume as much as $5 billion of any losses on sales of the investments, up from a previous commitment of $500 million, said Christopher Swift, vice president for life and retirement services, in an interview. AIG also will inject an undisclosed amount of capital into some of the subsidiaries, he said.

Moody's Investors Service and A.M. Best Co. both cited the writedowns in May when they downgraded New York-based AIG's credit ratings. State regulators in Texas said they didn't know AIG was investing cash collateral from the securities-lending business in subprime-linked assets and were concerned the insurance units hadn't put aside enough capital to cover potential losses.

``We were aware of this portfolio, but we didn't have transparency on what was in it because it was off-balance sheet,'' said Doug Slape, chief analyst at the Texas Department of Insurance in Austin, which oversees three AIG insurers that have suffered about 60 percent of the writedowns. (You are a regulator you great prune. You go ask for it and get it from them - Jesse)

The reduction of asset values in the securities-lending portfolio was part of the $38 billion in pretax writedowns that AIG reported during the past three quarters. That total included reductions of $20 billion on guarantees known as credit-default swaps and $18 billion on mortgage- and asset-backed securities, including some tied to subprime home loans. Most of the mortgage-related holdings are in the securities-lending pool.

Recovery Expected

The securities-lending business caters to banks and brokerages that borrow for themselves and clients to hedge trades, cover bets that a stock will fall and avoid trade- settlement failures. AIG's life-insurance subsidiaries invest their premiums in stocks and bonds. To make extra money, they lend out those securities through a central pool that invests cash collateral.

AIG said in regulatory filings that about $9 billion of the markdowns on mortgage-backed securities resulted from temporary market-value declines that it expects to be reversed. Those unrealized losses don't affect earnings.

In the meantime, its support for the insurance subsidiaries relieves pressure to sell the holdings at a loss should the banks and brokerages close out their loans, said Laura Bazer, a senior credit officer at Moody's in New York.

``At that point the AIG life insurance companies would have to make a decision to find cash elsewhere or sell the securities at a loss, which nobody wants to do,'' Bazer said. ``If you think those securities are money good, you want to hold them until maturity.''

`Adequate Liquidity'

AIG's securities-lending program hadn't experienced a ``significant'' decrease in loan balances as of March 31, according to a May 8 filing with the U.S. Securities and Exchange Commission. Swift said in an interview last week that AIG has ``adequate liquidity'' to fund any required returns of collateral.

Securities lending has traditionally been perceived by the Federal Reserve and other bank regulators as a business with few risks. Other companies with securities-lending operations include MetLife Inc., State Street Corp. and Northern Trust Corp. While some invest their collateral only in Treasuries, others buy bonds backed by mortgages and credit-card receivables to get additional yield, said Josh Galper, a principal at Vodia Group LLC, a Concord, Massachusetts, financial-services research firm.

``The range of investments go from very conservative to very risky,'' Galper said.

$78 Billion

State regulatory filings show that AIG's securities-lending unit used almost two thirds of its $78 billion in cash collateral to buy mortgage-backed securities that plunged in value starting last July as subprime defaults climbed. Most of the securities were rated AAA or AA. The market value of the collateral pool, including cash and securities, fell to $64.3 billion as of March 31.

In addition to the $9 billion in unrealized losses, AIG and its 12 insurance and annuity units that participated in the securities-lending pool incurred $3.9 billion of realized losses, or declines the company no longer classifies as temporary. These losses reduced AIG's earnings, primarily in the fourth quarter of 2007 and the first quarter of 2008.

AIG has a third category of investment loss: those booked when an asset is sold below original cost. The insurance units are required to reimburse the securities-lending pool for their share of these losses. Though none of these losses have been recorded, AIG has agreed to cover up to $5 billion of them.

Maturity Mismatch

Subprime holdings in the securities-lending pool weren't the only issue cited by regulators. Some state officials said AIG invested more than half the collateral in debt securities that on average would pay off in three to 10 years. Because AIG loaned bonds for periods ranging from overnight to 60 days, the insurance units could be exposed to a cash crunch if borrowers suddenly returned securities and demanded their collateral back.

``We were surprised at the length of the paper,'' said Joseph Fritsch, director of insurance-accounting policy at the New York State Insurance Department in Manhattan. Still, Fritsch and Erin Klug, a spokeswoman for Arizona's insurance department in Phoenix, both said AIG had notified them about the losses in the securities-lending portfolio and voluntarily decided to backstop the insurance units involved.

``AIG did the right thing,'' Fritsch said. ``They have put the guarantees in, and they have put money into the companies.''

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net