Ambac Gets Crushed, Another Bank Wobbles

Remember those monoline insurers that used to move the market by a couple hundred points in either direction? The ones that everybody seems to have forgotten about? Well, Ambac (ABK) just reported earnings. HINT: Pre-market, ABK is -20%...

Ambac Posts Loss on CDO Writedowns, New Business Drop (Update2): “Ambac Financial Group Inc., having staved off a credit-rating downgrade, posted a wider loss than analysts estimated after taking $3.1 billion in charges for subprime-mortgage securities.

The first-quarter net loss was $1.66 billion, or $11.69 a share, compared with net income of $213.3 million, or $2.04, a year earlier, New York-based Ambac said today in a statement. The company's operating loss of $6.93 a share was larger than the $1.82 estimated by six analysts surveyed by Bloomberg.”

The operating loss of $6.93 a share was larger than the $1.82 estimated by six analysts? Hahaha… Analysts are generally about as useful as a third nipple. (READ: What's Analyst Worth? Not a Penny as Estimates Miss (Update2))

“New business slumped 87 percent as states and municipalities shunned its insurance and the market for mortgage securities dried up. Ambac ratcheted up estimates for claims it will need to pay on home-loan debt by $2 billion.”

ABK is dead. Done. Kaputt. There is NO new business, therefore there is no new cash flow to pay for pending losses. Nuff said.

“Ambac raised $1.5 billion in March after credit rating companies threatened to strip the bond insurer of its top rating following record losses on subprime-mortgage securities. The additional capital staved off downgrades by Moody's Investors Service and Standard & Poor's. Fitch Ratings cut Ambac Assurance Corp. to AA in January. All three companies have negative outlooks on the ratings.”

This first quarter loss of $1.66 billion completely wipes out the $1.5 billion that ABK could BARELY scrape together. ABK had to TRIPLE the number of outstanding common shares to 285 million to raise that money.

“The company this week said it's seeking shareholder approval to increase authorized shares to 650 million from 350 million.”

Lacking both imagination and any real chance in hell, ABK is going for more of the same. Can you say MASSIVE dilution? ABK is worth absolutely nothing. Why anybody would hold a long position in their common is beyond me. A complete and full bailout would probably still push common to ZERO. Especially a government bailout.

HVB Chief Sees `Significant' First-Quarter Writedowns (Update2): “HVB Group, UniCredit SpA's German banking unit, said it expects “significant” writedowns related to the credit crisis in the first quarter.”

Another German banks warns. HVB Group is the second largest private-sector bank in Germany and with Bank Austria Creditanstalt, the undisputed market leader in Austria. With over 61,700 employees, 2,000 branch offices and more than 8.8 million customers HVB is not the kind of bank you want to see get in trouble.

HVB doesn’t report until May 8th. To pre-announce like this definitely means that the writedowns will be massive.

Bondholders Lucky to Get 10 Cents on Dollar in Looming Defaults: “The looming wave of bankruptcies is unlikely to be kind to bondholders. And they have only themselves to blame.

Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents.”

While painful for the suckers holding this junk debt, consider the world of pain this will cause the uber nerds that fancied themselves financial engineering Gods and wrote heaps upon heaps of completely under priced CDSs (Credit Default Swaps)? Whole teams of math ninjas at the banks and hedge funds wrote records amounts of CDSs off their ridiculously complex and perpetually optimistic models. This was of course done at a time when corporate defaults had been at record lows for the most consecutive years in the history of man.

“Chapter 11 business bankruptcies rose 16 percent in the first quarter.”

It would seem that nobody sat these suckers down and explained to them the meaning of the word CYCLE and how to combine it with the words BUSINESS and ECONOMIC.

cy·cle:
–noun
1. any complete round or series of occurrences that repeats or is repeated.
2. a round of years or a recurring period of time, esp. one in which certain events or phenomena repeat themselves in the same order and at the same intervals.

Maybe they all listened to Larry Kudlow and his “Goldilocks economy” FOREVER crap.

The TED Spread has moved up again. Three month LIBOR remains at 2.92 today.

Monoline Related Posts:
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Fragile Banks: More Bailouts, More Capital

This is the SECOND German bank to run into trouble this month:

Duesseldorfer Hypo Rescued by Bank Group After Crisis (Update2): “Duesseldorfer Hypothekenbank AG, the closely held German public-sector lender, was bailed out by a group of banks, at least the fifth lender in the country to get emergency aid since the collapse of the U.S. subprime market.”

I must emphasis the fact that it is the FIFTH bank in Germany to get emergency aid.

“The BdB banking association bought Duesseldorfer Hypo from the Schuppli family and aims to sell it to a new owner, it said in an e-mailed statement late yesterday. The bank, which has a balance sheet of 26.7 billion euros ($42.4 billion), has booked 8.5 million euros in writedowns on asset-backed securities since last year. It doesn't own subprime loans, it said.”

So, despite NOT directly owning any subprime loans, this bank quickly and quietly imploded.

“Writedowns and lower demand for public-sector financing almost erased profit at Duesseldorfer Hypo last year, after earnings of 22 million euros in 2006.”

With worse still to come as consumer credit and commercial real estate are all expected to start to suffer now, that was enough to kill this bank.

RBS to Sell $24 Billion in Shares After Markdowns (Update4): “Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, will sell 12 billion pounds ($23.7 billion) of new shares to investors in Europe's largest rights offer to boost capital depleted by writedowns.

RBS fell as much as 5.7 percent in London trading after saying it marked down assets by 5.9 billion pounds and will cut the 2008 dividend.”

RBS got a little greedy and stretched itself a little too thin just a couple of months ago with the acquisition of ABN Amro Holding NV.

“RBS's capital cushion shrank after credit markdowns and its part in last year's 72 billion-euro ($114 billion) purchase, mostly in cash, of ABN Amro Holding NV with partners Banco Santander SA and Fortis.”

The acquisition battle was a long one with many different players furiously outbidding and out maneuvering each other for the privilege of being the GREATEST FOOL.

I shit you not, but now the SAME dumbass analysts that called for more and more acquisitions are calling for divestitures. Hilarious.

“They have overpaid for acquisitions and have had a weak capital base, but there's nothing in this statement which confesses that they have made significant mistakes over recent years. We would like to see disposals from the global banking and markets portfolio which got them into trouble.” -Simon Maughan, Analyst at MF Global Securities Ltd. in London

“The bank plans to issue 11 new shares for every 18 existing shares at 200 pence each, or 46 percent below yesterday's close.”

That is expensive. Existing shareholders just got seriously diluted… and still it may not be enough:

“Moody's Investors Service said today that it may downgrade the B+ financial strength rating and the Aaa senior debt and deposit ratings of Royal Bank of Scotland Plc and the Aa1 senior debt rating of the group.”

National City Follows Wachovia, WaMu in Rush for Cash (Update1): “National City Corp. joined Wachovia Corp. and Washington Mutual Inc. to tap what KBW Inc. calls “an abundance” of capital, after losses tied to the slumping housing market made U.S. financial companies a bargain for investors.

National City, Ohio's biggest bank and subprime lender, agreed to sell a $7 billion stake to a group led by Corsair Capital LLC yesterday, at a discount to market price. The move, which would dilute existing shareholder value, sent the stock plummeting almost 28 percent.”

The discount was 40% to the previous close. That would certainly warrant at least a 28% drop.

Bottom pickers in financials are going to get whacked. Wait for all the capital raising to have been concluded. You won’t miss out. Prices will languish for years as the banks work through their balance sheets and retrench.

Prices are at resistance just below the psychologically important 1400 level on the S&P 500 (SPX). Resistance ranges from about 1390 to 1396 and appears to be pretty solid. The low volume rally that got prices this far should run out of steam here. The bounce from 1257 has been impressive. Oversold conditions have been alleviated. Complacency has set in (VIX, grey). It is time for the next leg down. The financials started declining yesterday, even as the broader markets held their ground.

The Mortgage Finance Index (MFX) couldn't even make it past the recent swing high of 52.73 on this bounce. More importantly, notice how MFX turned south first, while the S&P 500 (SPX, grey) continued to squeeze higher to about 1390. The broader markets CANNOT sustain a rally of any kind as long as the financial complex continues to a source of weakness. The REAL bottom will be confirmed when the broader financial complex LEADS the rally out the hole. I don't expect the lows around $40 to hold...

As the banks desperately go raising capital, the dilution effects alone will result in declining equity prices. Expect a test of the lows around the $75.00 area on the Bank Index (BKX) in the very near future. Failure of these lows is probable.

Related Posts:
Credit Losses and the Shape of the Recession
Watch the East Buy the West for Cents on the Dollar
Sarcastic Rant on Fannie and Freddie

The Race to the Bottom Accelerates

There may have been some confusion over these charts in my last post Citigroup Earnings, Downgrades and LIBOR. Up is down and down is up. The chart is RISING from the bottom left to the top right as rates FALL. To calculate the yield that the front month Eurodollar (XED) contract is implying, you take 100 minus the price. For example, 100 minus Friday's close of 97.09 results in a yield of 2.91%. At the beginning of April, yields were about 2.25%. As you can see the moves late last week have raised yields significantly....

Also notice how the Eurdollar (XED) and LIBOR (LIBOR) track closely. LIBOR is the most important shortest term interest rate and therefore Eurodollar prices heavily off of LIBOR.

Nobody actually expects the Fed to hike rates anytime soon. The fact that short rates have risen quite sharply despite the best efforts of the world's Central Banks is evidence that they have or are losing control...

Depending on where you start, you could argue rates rose by as much as 1% since March. The most important rates in finance use LIBOR as a benchmark, floating and fixed rate mortgages and swaps to name a few.

While still range bound, yields along the entire curve have moved up significantly. The further out on the curve, the more significant the move higher. This is most definitely NOT what Bernanke had in mind when he started cutting. The market is not supposed to take away his rate cuts...

However, in reality it isn't the Fed that sets rates at all but the market. Banks have been unable or unwilling or both to cut their rates on everything from mortgages to car loans and credit cards. Eventually too, traders and investors will demand a higher yield from US Treasuries to compensate for inflation and a declining currency...

So, in yet another desperate attempt to bring LIBOR and all associated short rates back down into their desired ranges:

Bank of England Swaps Bonds to Revive Bank Lending (Update7): “The Bank of England offered to swap government bonds for mortgage securities to kick-start bank lending, with Governor Mervyn King pledging to meet demand even if it exceeds an estimate of 50 billion pounds ($100 billion.)

The measures, backed by Prime Minister Gordon Brown's government, mimic a swap of $200 billion of securities by the U.S. Federal Reserve last month as central banks around the world struggle to prop up financial markets. A surge in borrowing costs prompted U.K. banks to withdraw their best mortgage offers, threatening to exacerbate the worst housing downturn since 1992.”

Well, the TSLF didn’t work. But that obviously isn’t preventing the BOE from employing the same trick. Those of you who watched equities rally over the last week and started toying with the idea that the worst was over, better think again. Would this really be necessary NOW, if the worst was over? Perhaps things have deteriorated further… to the point where the BOE has finally decided to try something, anything else.

The race to the bottom continues…

Stocks `Fire Sale' Burns Investors as Debt Costs Rise (Update1): “A stock market fire sale at the cheapest prices in 13 years is burning investors as companies turn away from the highest credit costs in more than a decade.

Corporations in the U.S. and Europe must repay $1 trillion in debt maturing this year, the most since 2000, data compiled by New York-based Citigroup Inc. show. As the cost of borrowing for investment-grade companies climbed to 2.35 percentage points above government debt in the past year, firms such as Wachovia Corp., Wesfarmers Ltd. and Imperial Energy Plc are selling shares for an average 14.7 times profit, Bloomberg data show. That's the lowest since at least 1995.”

I don’t need to tell you that this CAN’T end well under the current conditions…
So how will the companies of the world deal with these problems? Well, simply put, they will issue shares like you won’t believe…

“Businesses have sacrificed shareholders as the cost of paying dividends decreased to a six-year low versus interest on bonds. The difference between the extra yield investors demand to buy investment-grade bonds from companies tracked by New York-based Merrill and the dividend yield of stocks in the MSCI World Index narrowed to 0.4 percentage point this month, from 1.42 points a year ago.

The last time paying dividends cost the same as bond interest was in December 2000, preceding an increase in new shares issued in the following 12 months, data compiled by Bloomberg show. The same increase now would put almost $800 billion of new equity in global markets in the next 12 months as cash-strapped companies tap investors to repay debt and fund operations.”

Just what struggling longs need eh? Can you say MASSIVE dilution? … and it isn’t gonna be cheap!

“After the worst quarterly decline in the MSCI World Index since 2002, investors are less willing to risk money on corporate earnings than at any time since at least 1995, measured by the gauge's price-earnings ratio. Investors paid an average of $14.71 for every dollar of earnings generated by the 1,940 companies included in the stock benchmark last month. A year earlier, investors paid $17.09 per dollar of profit.

That may force companies to sell larger stakes to make up for financing shortfalls. Banks and brokerages, whose balance sheets have been the hardest hit by credit market losses, have raised or announced plans to seek at least $163 billion in capital since July.”

The equity discount is going to hurt existing shareholders. Major long term shareholders know if their core holdings are likely to have to raise additional capital in the near future. It would therefore make sense for them to reduce their positions now and then just participate in any offering, which would be at below market prices, to quickly and cheaply rebuild their original long positions.

Therefore, expect quite the tsunami of supply as long term equity holders attempt to exit before the companies can attempt to raise additional equity. This does not bode well for equity prices.

Related Posts:
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Citirgroup Earnings, Downgrades and LIBOR

Citigroup (C) reported earnings this morning… or lack thereof. The market threw a little bit of a party. C and broader equity futures spiked up on the news.

Citigroup Reports Loss on $15 Billion of Credit Costs (Update1): “Citigroup Inc., the biggest U.S. bank by assets, posted its second straight quarterly loss on at least $15 billion of writedowns and increased loan losses as customers fell behind on home, car and credit-card payments.

The first-quarter net loss of $5.11 billion, or $1.02 a share, compared with earnings of $5.01 billion, or $1.01, a year earlier, New York-based Citigroup said in a statement. While the loss was worse than the $4.75 billion predicted by analysts in a Bloomberg survey, revenue exceeded their estimates. The shares climbed 6 percent to $25.46 in early New York trading.”

So C missed. But since it wasn’t an apocalyptic report, the broader markets are in rally mode. With revenue down 48% and $39 billion in write-downs booked, can it possibly get any worse?

“The bank cited increased delinquencies on mortgages, unsecured personal loans, credit cards and auto loans, amid “trends in the U.S. macroeconomic environment, including the housing market downturn and rising unemployment.””

Actually it can. The losses on mortgages are far from over as housing prices are expected to continue to drop. The losses on unsecured personal loans, credit cards and auto loans are just now beginning to accelerate.

While the Bulltards are cheering, Moodys and Fitch have quickly and quietly snuck in some downgrades on C.

Fitch lowered C to AA- with a NEGATIVE outlook.
Fitch cut Senior Unsecured Debt to AA- from AA
Fitch cut Long Term IDR to AA- from AA

Fitch also believes that selling the frozen buyout loans that C has on its balance sheet won’t free up capital. Probably because C would have to finance the damn deals themselves and foot the first few losses to get a sale done.

Fitch downgraded Citigroup’s Individual Rating from A to A/B.
The ratings explained here:

“A denotes:
A very strong bank. Characteristics may include outstanding profitability and balance sheet integrity, franchise, management, operating environment or prospects.

B denotes:
A strong bank. There are no major concerns regarding the bank. Characteristics may include strong profitability and balance sheet integrity, franchise, management, operating environment or prospects.

C denotes:
An adequate bank, which, however, possesses one or more troublesome aspects. There may be some concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. D denotes:
A bank, which has weaknesses of internal and/or external origin. There are concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. Banks in emerging markets are necessarily faced with a greater number of potential deficiencies of external origin.

E denotes:
A bank with very serious problems, which either requires or is likely to require external support.

F denotes:
A bank that has either defaulted or, in Fitch’s opinion, would have defaulted if it had not received external support. Examples of such support include state or local government support, (deposit) insurance funds; acquisition by some other corporate entity or an injection of new funds from its shareholders or equivalent.

Notes:
Gradations may be used among the five ratings: i.e. A/B, B/C, C/D, and D/E.”

Moody’s affirmed C’s ratings, but changed the outlook to NEGATIVE.

While equities are throwing a mini-party this morning, LIBOR is spiking hard again. The financial system is under HUGE stress.

The Eurodollar front month is getting absolutely smashed as LIBOR continues to spike. All technical levels have been destroyed. The front month is pricing in a 75 basis point hike now. Fun times.

I will repeat that. RATE HIKES. Not cuts.

Those of you thinking:
WTF is LIBOR?
WTF is a Eurodollar?

Start reading. Start learning. This is about to become the next big thing…

Related Posts:
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

The South Sea Bubble and Todays Central Banks: FRB, BOE, ECB

The South Sea Bubble was one of history’s worst financial bubbles. There are also a very important lessons to be learned from the South Sea Bubble. Strangely, nobody seems to have learned them…

In 1711, the British government converted 10 million pounds of its war debt into the stock of the newly established South Sea Company, which had been granted exclusive trading rights in Spanish South America.

At the time, there were a few brave souls out there that dared argue that this was NOT a good idea. After all, the government really shouldn’t be making risky, speculative bets with your hard earned money. We all know what happened. It is called the South Sea Bubble after all.

Fast forward to today…

The Bank of England is about to start to accept MBS as collateral in exchange for Government Bonds. Read the full article here.

“It is understood that the Treasury about to finalize a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.”

Once again, only a small minority has dared question these actions. Once again, this isn’t likely to end well for the same poor bastards: You, the taxpayer.

As I said in a recent post: Dammit, why won’t you learn?

If I thought it would make a difference, I would buy the damn pamphlets and send the originals to ‘Swervin’ Mervin King of the BOE and ‘Helicopter’ Ben Bernanke of the FRB. Then I’d make ‘The Maestro’ Alan Greenspan eat them in public for being the first real serial bubble blower.

Ye Olde Credit Crisis: 18th-Century Warning for Sale (Update1): “The Bank of England should take care when it invests public funds in risky or money-losing ventures, according to documents being sold by Christie's International.

The warning is no reference to the U.K. central bank's role in the rescue of Northern Rock Plc. The London-based auction house said it refers to what might be called “ye olde credit crunch” of 300 years ago.

The 1715 pamphlets “The Ruine of the Bank of England, and All Publick-Credit Inevitable” and “The Directors of the Bank of England, Enemies of the Great Interest of the Kingdom” may fetch as much as 20,000 pounds ($40,000) in a London sale on April 30.

The forecasts of doom were written by John Holland, co- founder of the Bank of Scotland, who criticized the British government for converting the national debt into the stock of the ill-fated South Sea Company.”

Of all the central banks, who is the BADDEST?

Fed Accepts Dodgy Collateral in Race to Bottom: Caroline Baum: “The Fed isn't alone in broadening the range of collateral it is willing to accept in response to the credit crisis. In December, the Bank of England added asset-backed securities to its eligibility list. The European Central Bank, which has extended the term of its loans in recent months, has always accepted a range of marketable and non-marketable assets as collateral.

The European press is abuzz with stories about Spanish banks tendering boatloads of asset-backed securities as collateral for ECB loans.

So the Fed is in good company in the race to the bottom on collateral quality.”

Well, the race to the bottom is just getting started. However, Bernanke is definitely leading with the Bank of England not far behind. The more cautious Jean-Claude Trichet over at the ECB is making up the rear.

Related Posts:
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble