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Thread: 'Black Plague' about to be unleashed by MBIA and AMBAC ?

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    Banned Melonie's Avatar
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    Default 'Black Plague' about to be unleashed by MBIA and AMBAC ?

    (snip)"Some of the largest bond insurers are are currently unable to cover the losses that are piling up from the meltdown in mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Their business model is hopelessly broken and they will require an immediate $143 billion bailout to maintain operations. The largest of the bond insurers is MBIA.


    Stock analyst Michael Lewitt, quoted in Bloomberg:

    "MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (eds note; pure garbage). MBIA was being priced as a weak CCC-rated credit when it issued its bonds last week; it is now being priced for a bankruptcy. MBIA's stock, which traded just under $68 per share last October, dropped another $3.50 this morning to under $10.00 per share.”


    Barclay's estimates that the investment banks alone are holding as much as $615 billion of structured securities guaranteed by bond insurers. If the insurers default, hundreds of billions will be lost via downgrades.


    So, in practical terms, what does it mean if the bond insurers go under?


    It means that the system will freeze and the stock market will crash. Here's how TV stock guru Jim Cramer summed it up last week in an interview with MSNBC's Chris Matthews:

    “But, Chris, there is something I would urge all the candidates to think about and our Treasury Secretary, which is that there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points. They've got to be shut down and the insurance given to a New Resolution Trust. This is going to happen in maybe two or three weeks, Chris, it going to on the front of every newspaper and no one in Washington is even willing to admit it.

    Chris Matthews: “So who are you including in these mortgage companies that are going to go belly-up; give me a description?

    These are MBIA and Ambac remember the companies that Merrill Lynch and Citigroup wrote down a lot of stuff the other day? All these companies are relying on insurance to save them. The insurers don't have the money. There's also personal mortgage insurance; that's PMI, is one company; MGIC is another. Chris, I am telling you that these companies do not have the capital to “make good”. And when they do fall, and I believe it is when---if the government does not have a plan in action; you will not be able to open the stock market when they collapse.” No one is even talking about the fact that these major insurers, who insure $450 billion of mortgages are all about to go under.”"(snip)

    from

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    Default Re: 'Black Plague' about to be unleashed by MBIA and AMBAC ?

    this is really scary...
    i haven't even considered this possibility. Melonie is it in your opinion likely to actually happen and in what time frame?

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    Default Re: 'Black Plague' about to be unleashed by MBIA and AMBAC ?

    I definitely think it would happen. Though, it's not as cataclysmic as it sounds...
    Oh Canada, we stand on cars and freeze...

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    Default Re: 'Black Plague' about to be unleashed by MBIA and AMBAC ?

    the real insidious aspect of the bond / mortgage insurers being on the edge of insolvency isn't what will happen to the bond insurers themselves. The cataclysmic potential lies with what happens when the Fitch rating of 'insured' bonds held by other financial institutions declines, which in turn will cause their book / market value to decline.

    If you happen to be a regional bank where over 50% of the bank's assets happen to be in the form of AMBAC 'insured' bonds or high LTV mortgages insured by MGIC, and if those bonds are derated from AAA to B because the insurance is worthless, and if those bonds take a 20-30-50% tumble in market value because their lower investment rating forces institutional investors to dump them from an investment fund / retirement portfolio, and if the regional bank must then write off the 20-30-50% loss, plus if the regional bank must then stop making new loans because the writeoff has caused their capital reserves to decline below regulatory minimums, then this is NOT a welcome development !

    The root of the potential problem is that, since Bill Clinton allowed the repeal of the last provisions of the Glass-Steagall act, savings banks and regional banks have been playing the 'offloading of risk' game right along with investment banks. Thus the asset side of the banks' balance sheets no longer contains actual mortgages (which can be determined to be good or bad on an individual basis), but mortgage / commercial paper (which is determined to be good or bad categorically). And unlike the good old days where the banks could actually prove ownership of a property mortgage and foreclose to recover their money, these days the actual ownership of the property mortgage might be a huge investment bank or a Belgian Dentist or an anonymous Cayman Islands hedge fund investorm which based on a recent US court ruling could cause major complications when future foreclosures are attempted to recover badly needed 'cash'.

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