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| User Info | Monoline question in forum [General] | |||
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Xoptionstrader Posts: 158 Incept: 2008-01-04 
Chicago Suburbs 
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Can someone in a nutshell explain to me what some of the previous posts on the tickerforum are discussing. The insurance agencies you talk about, are they mortgage insurance companies that guarantee a return on a default if someone is paying PMI on a loan over 80% of appraised value? I've been seeing posts about muni bond implications, etc, and just trying to wrap my head around what the difficulties for these insurers exactly means. Thanks 2008-01-18 20:50:10
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Tienkou Posts: 2081 Incept: 2007-09-09 
Connecticut Online
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Take a look at this page. There is a drop down box to look at the various parts of Ambacs portfolio. http://ir.ambac.com/phoenix.zhtml?c=8077.... ---------- Barack Hussein Obama - The last President of the First American Revolution. The US Congress has abdicated its role as a governing body. The most dangerous man is the one with nothing left to lose. Our government is making more of them everyday. 2008-01-18 21:01:15
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Xoptionstrader Posts: 158 Incept: 2008-01-04
Chicago Suburbs
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Tien, So what does that mean, all these projects could be stopped and investors pull out worse case scenario? The ramifications would be horrific!!!!!!!!!!! Not to mention then the losses for money invested could be staggering? 2008-01-18 21:06:43
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Bw8472 Posts: 6446 Incept: 2007-06-28
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Monoline insurers write insurance contracts on everything from CDO's to Muni bonds. Munis would get killed without the insurance since they would in some cases lose the ability to write more bonds, those out there are what they are but WB is already insuring those with a new company so no real problems there. The problem is if you are bank A and you have 10 billion in worthless CDO's but 10 billion in insurance, so far you are good, at the moment your insurance company goes bad then you have only the CDO's which are worth maybe 25 cents on the dollar, so you are out 7.5 billion in an instant. Multiply this all across the financial universe and soon no one would trust anyone until the new losses were accounted for, pretty much the end of the financial world as we know it. PMI or mortgage insurance companies like PMI and MTG going out would leave the mortgages naked to losses, thus lowering their value and doing roughly the same thing to straight mortgages held by fannie and freddie and banks. Their portfolios would suffer instant devaluations, by formula by extracting typical losses and then adding back in insurance claims they had previously used to offset these for a new true loss picture. For example, mortgage losses in Q1 of 1 billion after insurance payments of 2 billion... so the new losses going forward could be expected to be 3 billon instead of 1 instantly. This just sends valuation shockwaves throughout the system, contracts it so that no one has any money to lend, no one buys ****, game over. I've said that this was going to happen for a year now, takes time, it's here and it's photoguy bad. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln Last modified:
2008-01-18 21:09:09 by bw8472
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Xoptionstrader Posts: 158 Incept: 2008-01-04
Chicago Suburbs
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So to understand, say I had money to invest in a project, OHare expansion in Chicago for example, and I was guaranteed a return on a bond, say 5%, and I invested 100,000, what could happen. Could I just not receive my 5% or could I actually lose my 100,000 (or some lesser part of that) if the ratings are cut, the project stops?
2008-01-18 21:08:57
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Bw8472 Posts: 6446 Incept: 2007-06-28
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That part of the business is fine, since other insurers are out there now you'd just switch insurance companies much like you were insured for car accidents but your particular insurance agency went out, you'd be out the premium, interestingly enough this happened to me once. My wife got a DWI years ago, so we had the hefty insurnce premiums of like 800 every six months, our particular company went under the day after my check cleared, I was out the $ but got new insurance and all was good. Same principle, except the toxic stuff no one will now touch you're just hosed, it's like having cancer and having your life insurance company go under, no one else is going to step up, you are hosed. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2008-01-18 21:13:55
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Xoptionstrader Posts: 158 Incept: 2008-01-04
Chicago Suburbs
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OK, I think I have a basic understanding. So to keep this in mortgage perspectives (what I know) if you borrow over 80% of your property's value, you pay PMI. So say you buy a 300,000k home at 90% and owe 270,000. Your PMI insurance payment is roughly $250 a month, after 1 year you've paid in $3000 to the insurance company. Now lets say the home value has dropped to 270,000 and a bank owns the loan for 270,000. Who's on the hook for this if the borrower can't pay? Does the insurer protect to 80% of property's value only? If so, is it previous value or lower value? Insurer in a nutshell collected $3000 but gonna be out a lot more, but how much?
2008-01-18 21:23:55
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Bw8472 Posts: 6446 Incept: 2007-06-28
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Mortgage insurance in your example works like this. If you borrow 100% or buy with no money down, the insurance company is on the hook for either 18 or more likely 35% of the transaction. In your case lets assume 35% because the 18% option cost much more in PMI and a higher rate, the reason there are two options was because PMI wasn't tax deductible so a borrower might opt to pay a higher rate to the lender and then the lender would accept a lower coverage amount so that more of the payment you made was tax deductible, interest is, PMI was not. So if 35% is the factor then if they take your house and sell it for 270k and lose another 10k in legal fees or something then the insurance or PMI company would lose 40k. That's not really reasonable though, most foreclosures could cost much more and so a better example would be they get 70% or 60%, let's say 60% on the dollar for your house. PMI company is on the hook for any loss up to 35% so this is a full loss case, which would be 105k, they write the mortgage company a check and the mortgage company eats the remaining 15k and it's over. This is how PMI works. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2008-01-18 21:31:45
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Bw8472 Posts: 6446 Incept: 2007-06-28
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All these Helocs or 80/20 loans grew out of the fact people generally don't like PMI, it was never tax deductible until 2007, new loans are under certain rules now but that's why people split the loans. The idea was the 80 is now safe and the 20 assumes the risk, which is fine if house values go up, if not...... well now you see why all the 20 parts of the 80/20's are falling like a rock to nothing in value, they're first in line for the bullet. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2008-01-18 21:35:13
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Bw8472 Posts: 6446 Incept: 2007-06-28
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By now you can see why this is hopless in a falling market, in a falling market 70% recovery on a foreclosure in NORMAL times is replace with 60% or less. In boom times you might get close to 90 or 100% recovery, so we've gone from not a care in the world to OH **** in short order. OH **** rates were not charged on the PMI, they can't raise the cost now they contracted for less, which means they can't quadruple or quintuple them so that they have a prayer of remaining in business. Even if they could they'd kill the economy in the process, the losses are just there, if the PMI companies die it shifts to the holders of the mortgages, if they die, then it shifts to who lent them the money, which leads all the way back to the same place, our banking system, our pension funds, Hedge funds, every player on Wall Street. So now you know why they're squealing like stuck pigs, they're about ready for the meat hook, all of them. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2008-01-18 21:42:21
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Xoptionstrader Posts: 158 Incept: 2008-01-04
Chicago Suburbs
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Alright, so I took my question there to mortgages, which I appreciate the responses. Coming back to the question on the insurers, what other risks are out there? Why are the downgrades in companies like AMBAC so potentially negative?
2008-01-18 21:53:52
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Xoptionstrader Posts: 158 Incept: 2008-01-04
Chicago Suburbs
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I guess what I'm questioning are the ramifications...if you are an insurance agency and insured homes in New Orleans and Katrina came through, you know what you lost, the value of the homes (although I'm sure the estimate to rebuild was much less.) So looking at it this way, what are the insurers into and what can't they afford to pay? What are the worse case scenarios for coverage?
2008-01-18 21:57:18
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Luvs_footie Posts: 1712 Incept: 2007-11-26 Australia
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So now you know why they're squealing like stuck pigs, they're about ready for the meat hook, all of them. 
---------- Much of what we labeled Tin just two years ago is now known to have been truth. While today, what most think to be truth is Pure F**king Tin. The times....they are a changing 2008-01-18 21:57:37
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Bw8472 Posts: 6446 Incept: 2007-06-28
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I'm Citibank, I have 100 billion in CDO's on my SIV's I'm taking back onto my balance sheet, Ambac and MBIA has my back on those but ooops they BK, now I have only the value of those CDO's, which in the open market is 10 billion. I just lost 90 billion but hey we always knew that they couldn't pay, but now I can't even pretend anymore, I'm out of compliance and technically should be shut down right the **** now. The ramifications more or less are that anyone claiming they're assets at full value BECAUSE it was insured now has to immediately mark to market, will probably lose it's triple A rating and as such a chain reaction starts. I've got these insured CDO's in a Pension fund, insurer goes **** up, AAA rating goes poof, legally I must sell, without insurance I get 10 cents on the $. I'm a mutual fund, insurer goes **** up, run starts on my mutual fund, I have to liquidate non insured CDO, 10 cents on the $, mutual fund blows up, on news, panic starts, runs everywhere, national panic.... chaos, cats sleeping with dogs and then the staypuff marshmallow man comes and it's game over. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2008-01-18 22:06:33
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Xoptionstrader Posts: 158 Incept: 2008-01-04
Chicago Suburbs
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I like any references to ghostbusters. Can't help but make life seem a little less stressful. So ok, you have the mutual fund holders lose, maybe they are diversified, and maybe not...what about direct implications. With a downgrade, are their certain projects that are immediately cancelled/put on hold? I keep coming back to muni projects, but sure there is a lot more? 2008-01-18 22:16:09
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Bw8472 Posts: 6446 Incept: 2007-06-28
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Warren Buffett started a new insurer without all the baggage to insure new projects. New projects are fine because they're sound, what's not fine is all the garbage no one will touch with a 10 foot pole, anything existing that is based on mortgages or shaky older stuff is toast. So no one is going to cancel projects they'll simply get new bond insurance and move on. Warren Buffett is going to mint money off this, since he's going to get to cherry pick and he's the only game in town. They asked him to do it but good lord he's going to get even richer, he has no bad insurance on the books, only new stuff he gets to get paid for. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2008-01-18 22:28:54
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Bishie Posts: 353 Incept: 2007-11-01
Washington, DC
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Okay lets assume you want to do a 50 Billion CDO deal but woops there are no insurers out there to offer you a AAA rating on the top 60% of your deal of various Asset Backed Securities. Now you might have to structure the deal either as 40% AAA or the top 60% of the securities might carry a A rating instead. Now you say hmm I can't finance loans on NYC office towers at 0.85 debt service coverage ratios anymore. Ohh no panic!!! I might have to raise rates and/or lose market share! gasp! Now you have the loan on the NYC office building as a hung loan on your balance sheet or you have to take loss on securitization of 30% of the amount you lent out to Donald Trump. Voila the pain begins to strike home!
2008-01-18 22:29:44
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Dashingdwl Posts: 4038 Incept: 2007-06-26
los angeles
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If I understand correctly, the monolines were only charging a few bps to write insurance, like 6 to 7 bps of total amount insured. If true, cheap ho's indeed. ---------- Think Green Tip. 2008-01-18 22:32:03
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Bw It's not just mortgage backed securities and munis. Credit default swaps were bought on loans for everything, in order to keep the interest rates low. Credit card debt, Car and Truck and Commercial fleet loans, Corporate debt from AAA to junk, Commercial LOC, etc etc. When they say $450 Trillion in debt was insured by CDSs that's a real number. Some of it is multiple policies sold on the same debt, but even conservative estimates still put it at over $100 Trillion actual. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2008-01-18 22:37:12 by nothing
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Av8rphil Posts: 1817 Incept: 2007-06-26
Platte City, MO
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So GS with about $75B on their books could lose $67B?? Even the smartest guys in the room don't look too ****ing smart, huh? Might be hard to beat the quarter estimates when they actually realize that on their books. ---------- "Two things in life are infinite: the universe and human stupidity; and i'm not sure about the universe" -Einstein 2008-01-18 22:35:01
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Eli Posts: 3786 Incept: 2007-09-10
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Nothing I am kind of slow but it sounds like you are talking about TEOTWAWKI. Last modified:
2008-01-18 22:41:40 by eli
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Etrade_refugee Posts: 4873 Incept: 2007-11-14
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Eli, she is, and I'm finally coming to comprehend that she is right. Bailout or no bailout *the federal budget isn't big enough* to properly bail this out. ---------- Current best estimates (6/17/2009): CAR - 39 - 60 percent CFR - 2 - 10 percent Numbers are for the period 5/1/2009-4/30/2010 2008-01-18 22:46:13
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Eli That's why there is such a panic, the realization that over $100 Trillion in existing debt is going to have to be revalued and discounted, if a way to backstop the monolines is not found fast. The monoline never had the assets to cover the insurance they sold, they bought insurance on the $450 Trillion, they insured, from IBs, Hedge Funds, Pension Funds, Private syndicates etc. Those are the folks who don't have the money to cover their bets, so now the monolines are on the hook for it. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2008-01-18 22:51:20 by nothing
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Eli Posts: 3786 Incept: 2007-09-10
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Not when there is already talk of lowering the US Treasury below AAA. Well crap. I was hoping that I was wrong. 2008-01-18 22:49:30
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Bw8472 Posts: 6446 Incept: 2007-06-28
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That's what I was saying but nothing knows a lot more than me about specifics. That's why I'm saying they won't, they may step in to insure munis since they're otherwise relatively safe and they need insurance to function. There are plenty of cases to be made to do things like that to avoid otherwise sound stuff going up in smoke so you can still fly and **** but that's all they have room for. If they take on the garbage they take on death, they won't it's all bull**** to avoid reality, reality is we're ****ed. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2008-01-18 22:49:33
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