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Friday, February 29, 2008

Bulltards Get Slaughtered

Bulltards got slaughtered today.
Probably the only thing up today:

“In other news the price of human brain per gram (Hbpg) jumped from $15.20 to a new 52 week high of $1022.38 on friday. Analysts predicted no end to rising Hbpg prices, pointing to severe supply constraints. Analysts cited an increase of inbreeding and culturally induced idiocy.

Furthermore the grey cell market was badly shaken earlier this week by rumors about a sharp increase in the number of humans born without brainmatter. The rumor was quickly refuted as a marketing ploy of E-Z Credit Co Ltd (NYSE: DUM) to promote their brain substitute. But the damage was already done.”

Haha. Just kidding. Have a great weekend all.

Ambac Bailout: The Wheels Come Off

This morning Gasparino tried to convince the markets that the Ambac bailout ‘might still get gone’. The markets didn’t believe a word and the futures stayed down. So as fast as prices went up on the great bailout circle jerk, they have gone down. The S&P is now at 1350 and 1340 is next.

Financial Firms Face $600 Billion of Losses, UBS Says (Update1): “Financial firms are likely to face at least $600 billion of losses as the crisis triggered by the collapse of subprime mortgages batters banks, brokers and insurers, UBS AG analysts said in a report today.

Financial institutions have disclosed more than $160 billion of writedowns and credit losses. Banks and brokers stand to lose $350 billion, according to estimates from UBS's global banking team.

“We have to recognize the risk that the economy will suffer more damage than what consensus suggests,” wrote Geraud Charpin, head of European credit strategy at UBS in London. “All the investment schemes that have been built on the basis of a strong and resilient economic backdrop have to be unwound/ scaled down.”

American International Group Inc., the world's largest insurer, reported the biggest quarterly loss in its 89-year history yesterday after an $11.1 billion writedown on derivatives linked in part to subprime mortgages. London-based Peloton Partners LLP said yesterday it is being forced to liquidate a $1.8 billion hedge fund managing asset-backed debt because of tighter lending restrictions on Wall Street.

“The collapse of Peloton's flagship fund yesterday is a reminder to all investors that yesterday's rising star can be tomorrow's fallen angel,” Charpin wrote. “Leveraged risk positions are a cancer in this market and the sooner it is treated the better.””

Just a friendly reminder that the worst is not yet over… that in fact the worst is still ahead.

Peloton Blames Wall Street Lending Crackdown for Fund Collapse: “Peloton Partners LLP, the London- based hedge fund manager being forced to liquidate a $1.8 billion asset-backed fund, said it's a victim of Wall Street's reduced lending.

“Credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has compounded our difficulties and made it impossible to meet margin calls,” Peloton co-founders Ron Beller and Geoff Grant said in a letter yesterday to clients.”

Quit your whining Mr. Hedgie. IT’S A CREDIT CRUNCH. WHAT DID YOU THINK WOULD HAPPEN? Why didn’t you employ a decent level of gearing instead of a ridiculous level? Oh right, because you wanted to make a ridiculous amount of money instead of just a decent amount of money. Or, why didn’t you start to peel back some of that gearing as things deteriorated and volatility increased? Could it be that you were blinded by greed again?

“Peloton joins Thornburg Mortgage Inc. and Sailfish Capital Partners LLC on the growing list of funds and companies that have had to sell securities or shut down after banks restricted how much they could borrow, or demanded more collateral as values of securities backed by mortgages slumped. The world's biggest financial institutions are cutting off lines of credit to hedge funds after at least $163 billion of asset writedowns and market losses.”

As all kinds of credit is reigned in or eliminated entirely, risky assets can do nothing but go down… and I’m talking DOWN HARD. Years of ‘liquidity’ which in reality was nothing but easy credit are now being undone. QUICKLY. Nuff said. Trade accordingly.

AIG Drops on Biggest Loss in Firm's 89-Year History (Update1): “American International Group Inc., the world's largest insurer, fell in German trading after the company reported the biggest quarterly loss in its 89-year history.

AIG said in yesterday's statement it expects more writedowns this year amid the worst U.S. housing slump in a quarter century. Chief Executive Officer Martin Sullivan said “continuing market deterioration would cause AIG to report additional unrealized market valuation losses and impairment charges.”

The pretax writedown of $11.1 billion wiped out operating profit, which would have been $1.58 a share without the charge, Morgan Stanley analyst Nigel Dally said. AIG also had another $3.27 billion of losses before taxes on impaired holdings in its investment portfolio.”

You don’t want to see the world’s largest insurer reporting its largest loss ever for that is a very reliable signal that all is not well in the global economy. Emphasis on GLOBAL.

Watch the Yen. Risk is being aggressively and probably forcibly unwound.

Related Posts:
Monoline Bailouts: The Great Circle Jerk
Dennis Gartman And The Yen
The Yen As A Leading Indicator
Watch The Yen, Carry Trade Unwind

Thursday, February 28, 2008

Fannie Mae, Freddie Mac: The Dumbest Idea Ever

Yesterday in my post Simply Insane I listed all the economic releases that came out on Tuesday and explained just how bad they were… and why the market was simply insane. Allow me to continue that train of thought:

Durable Good Orders fell 5.3%, more than expected and the previous month was revised downward to a gain of 4.4%. These numbers are particularly terrible because inventories increased to a new high.

New Home Sales dropped 2.8% to an annual pace of 588 000, the fewest since February 1995. The median price slumped a record 15.1% as prices dropped from $254 400 to $216 000. Worse yet, inventories climbed to 9.9 months, the most since 1981.

Fannie Mae reported a shattering loss of $3.80 a share or $3.55 billion in the fourth quarter alone. Triple analyst estimates.

The market was holding onto recent gains, flat on the day, when another ridiculous piece of news hit the wires:

Fannie Mae, Freddie Mac Portfolio Caps Will Be Lifted (Update3): “U.S. regulators removed limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac, enabling the companies to increase financing for the slumping housing market.”

The market loved this news, with the S&P spiking from 1374 straight to 1390. Allow me to explain just how retarded this is:

“Unconstrained by portfolio limits, the government-chartered companies may buy more loans and bonds, replacing buyers who fled the market amid the collapse in subprime mortgages.”

So, the removal of the cap allows Fannie and Freddie to expand their portfolios. That is, buy more mortgages.

First of all, both companies are barely keeping it together worrying just about their current portfolios. Fannie reported yesterday, and it was devastating. Freddie reported this morning and it was just as devastating.

Second, forcibly replacing ‘buyer who fled the market’ is never a good idea. When rational, selfish actors voluntarily flee any market it is because the risk reward profile really, truly sucks. When the most speculative of players exits stage left, then conditions are or will become truly horrendous. Remember, these players are motivated solely by the profit motive and often don’t even have the downside risk of blowing through their own capital since they are investing yours.

Third, raising the caps concentrates the market. Two uber large players are taking an ever increasing concentration of market risk. Simply put Fannie and Freddie are taking on the entire systemic risk of the US mortgage market. They are doubling down into a declining, maybe crashing, market. As traders, what have we learned about averaging into a massively offside position?

Why the market would rally on this crap is anybody’s guess. I used the time prices spent above 1385, as a chance to re-establish my short positions.

This morning, Freddie Mac reported ‘doing their ass’ as well.

Freddie Mac Has Fourth-Quarter Loss Amid Housing, Credit Slump: “Freddie Mac, the second-largest source of money for U.S. home loans, posted a record $2.45 billion loss for the fourth quarter as rising mortgage defaults sent credit costs soaring.

The net loss, which amounted to $3.97 a share, widened from $401 million, or 73 cents, a year earlier, the McLean, Virginia- based company said in a statement.

Government-chartered Freddie Mac and the larger Fannie Mae, which account for 45 percent of the $11.5 trillion residential home loan market, are posting their biggest-ever losses as home foreclosures and tumbling housing prices increase costs on the mortgages they buy and guarantee. Chief Economist Frank Nothaft told investors in London yesterday that home prices will slide through 2009 and a recession is more likely.”

More importantly, Fannie Mae had true financial weapon of mass destruction buried in it’s 10Q filing. Hat tip to CubGuy99 over on the forums at Market Ticker.

“The total number of loans we purchase from MBS trusts is dependent on a number of factors, including management decisions about appropriate loss mitigation efforts, the expected increase in loan delinquencies within our MBS trusts resulting from the current adverse conditions in the housing market and our need to preserve capital to meet our regulatory capital requirements. For example, we recently introduced a new HomeSaver Advancetm initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with those purchases.”

Drop EVERYTHING. Let me make this crystal clear. This is what Fannie has just done:

1) You take a secured loan, in this case your mortgage.
2) You stop making payments on it, because you can’t afford to make payments.
3) You accumulate a couple of months of unpaid principal and interest.
4) Instead of having you default, as you should, Fannie turns your accumulated missed payments into an unsecured loan.
5) You carry on, apparently making payments on BOTH your mortgage and the unsecured loan.
6) Clearly, the dumbest idea ever.

When you take a secured loan and turn any missed payments into an unsecured loan you’ve just turned a higher quality loan into a lower quality loan. WTF?

Irrespective, the homeowner stopped payments on the loan because they could not afford to make them. How does turning those missed payments into yet another loan help? How can a reasonable person even entertain this idea? Again, WTF?

Turning a secured loan into an unsecured loan for the explicit purpose of not having to repurchase the bad paper, and thus avoid taking the mark to market loss is just insane. That loss is inevitable. Just take it dammit! Unbelievable.

The worst crimes EVER, are apparently LEGAL.

Freddie Mac Has Fourth-Quarter Loss Amid Housing, Credit Slump: “Freddie Mac, the second-largest source of money for U.S. home loans, posted a record $2.45 billion loss for the fourth quarter as rising mortgage defaults sent credit costs soaring.

The net loss, which amounted to $3.97 a share, widened from $401 million, or 73 cents, a year earlier, the McLean, Virginia- based company said in a statement.

Government-chartered Freddie Mac and the larger Fannie Mae, which account for 45 percent of the $11.5 trillion residential home loan market, are posting their biggest-ever losses as home foreclosures and tumbling housing prices increase costs on the mortgages they buy and guarantee. Chief Economist Frank Nothaft told investors in London yesterday that home prices will slide through 2009 and a recession is more likely.”

Durable-Goods Orders in U.S. Fell More Than Forecast (Update2): “Orders for U.S. durable goods fell more than forecast in January as a slowing economy prompted companies to reduce spending.

The 5.3 percent decrease in bookings for goods meant to last several years followed a revised 4.4 percent gain in December that was smaller than previously reported, the Commerce Department said today in Washington. Excluding transportation, demand dropped 1.6 percent, the third decline in four months.

New-Home Sales in U.S. Decreased More Than Forecast in January: “Purchases of new homes in the U.S. fell more than forecast in January as lending restrictions and plummeting prices kept buyers away.

Sales dropped 2.8 percent to an annual pace of 588,000, the fewest since February 1995, from a 605,000 rate the prior month, the Commerce Department said today in Washington. The median price slumped a record 15.1 percent from a year earlier.

The housing report showed the median price of a new home decreased to $216,000 from $254,400 a year earlier.

A decline in inventory failed to keep pace with the drop in demand. The number of homes for sale fell to a seasonally adjusted 482,000, and the supply of homes at the current sales rate jumped to 9.9 months' worth, the most since 1981.”

Related Posts:
Fannie Mae: Another Shoe Drops
Rogue Traders, Stop Losses and Averaging

Wednesday, February 27, 2008

Fannie Mae: Another Shoe Drops

Another shoe has dropped. Fannie Mae reported getting their ass handed to them. Pre-market, the bid is at a new 10+ year low. Since economic conditions are only just now accelerating to the downside, expect far worse.

Fannie Mae will continue to have trouble with both credit losses and capital levels. Fannie Mae is now considering cutting or eliminating their dividend.

Freddie Mac is reporting next. You can probably guess how that will turn out...

Fannie Has $3.55 Billion Fourth-Quarter Loss Amid Housing Slump: “Fannie Mae, the largest source of money for U.S. home loans, posted a $3.55 billion loss in the fourth quarter as the failure of homeowners to keep up with their mortgage payments dragged down the value of the company's assets.

The net loss was $3.80 share, compared with profit of $604 million, or 49 cents, a year earlier, Washington-based Fannie Mae said in a statement today. Excluding some items, the per-share loss was $3.79, compared with the $1.20 average estimate of 12 analysts in a Bloomberg survey.

An almost doubling in home foreclosures and an economy teetering near recession are reducing the value of the $2.3 trillion of mortgages the government-chartered company owns or guarantees. Chief Executive Officer Daniel Mudd said last month that Fannie Mae faces a “tough year.” The slump may force the company, which sold $7 billion in preferred stock in December, to raise more money, said Paul Miller, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia.

Fannie Mae “will continue to have trouble with both credit losses and capital levels,” said Miller, who on Feb. 25 downgraded the stock to “underperform.” Credit impairments will exceed company estimates and “the Street's expectations.”

The company, which accounts for at least one in five home loans, has lost more than half its market value in the past year as the housing slump deepened. Analysts at Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their recommendations to “sell” in the past week on concern that falling home prices will restrict earnings.

Fannie Mae's loan loss ratio was 4 basis points during the nine months ended Sept. 30. Fannie Mae in November estimated credit losses this year would double to 8 basis points to 10 basis points.

Miller says Fannie Mae's credit losses will rise to a range of 15 basis points to 25 basis points this year and in 2009. Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, forecasts a range of 11 basis points to 14 basis points. A basis point is 0.01 percentage point.

Freddie Mac is scheduled to report tomorrow. The McLean, Virginia-based company had losses of $2.02 billion in the third- quarter and $480 million in the year-earlier fourth quarter.”

Fannie Mae, by reporting timely audited financial results for the first time since 2004, met conditions for the removal of a federal limit on its $724 billion in mortgage investments imposed after a $6.3 billion overstatement of earnings. Its portfolio of home loans and mortgage-backed securities is one of its two main sources of profit.

Fannie Mae needs to complete the final items on a list of 81 changes in accounting, internal controls and governance in order to shed a requirement that it set aside 30 percent more reserve capital than normal, the company's regulator told a Senate committee on Feb. 8.”

Simply Insane

Yesterday was insane. There honestly is no other word. Allow me to explain:

Home prices fell 9.1% in December. That’s the most on record. Let me say that again. That is the largest decline in 20 years of record keeping.

Foreclosures went parabolic, increasing 90% in January over a year ago and 8% from December. Because of the lag time in the foreclosure process, these numbers essentially capture the mortgage defaults from last July. So you know this number can only get worse.

Produce prices rose 1%, twice as much as forecast. Over the last 12 months, producer prices rose 7.4 percent, the most since October 1981.

Consumer confidence fell to a five year low of 75. That low was made in January 1991 as the U.S. economy was coming out of a deep and painful recession and just as Gulf War I was fired up.

The Federal Deposit Insurance Corp (FDIC) reported that they were expecting a massive increase in bank failures in their Quarterly Banking Profile report. Regulators are bracing for the failure of well over 100 banks in the next 12 to 24 months.

The various ABX Indices continue to hit new lows. All of the ABX series are setting new record lows - below the levels of October and November. In English: Mortgages continue to deteriorate. More and more ‘homeowners’ cannot pay.

Crude broke $100 and $101. With such a fragile economy, that is terrible news. Just terrible.

As I posted yesterday, In A Pop Above Resistance, once the S&P cleared 1367 and 1371 on the monoline bailout chatter, an immediate Bearish posture was no longer warranted for technical reasons. Equities continued to add to these gains yesterday, hitting minor resistance at 1388.

But seriously, the economic, the fundamental news out yesterday was terrible. To rally, even on a technical basis, is just ridiculous. Our traders here come into the office every morning, sit down and look to deploy a full clip of ammo. Since we are all ‘flat’ by the end of each day, we can put our entire buying power to use each day. We are essentially the new ‘locals’ (new because we are on the screen, not in the pits) and as such thrive in these markets as we can ‘turn on a dime’. So these moves are almost a dream for us.

Today we have Durable Goods Sales and New Home Sales. Fannie Mae reports as well.

Honestly, who the hell is buying and going long, overnight? For the long run? I mean, sweet jesus!

Volatility (VIX) has had a nasty habit of hitting the 200 day EMA and thereby marking a high in equities. Volatility has peeled off nicely from the spike to 37. The emergency and other rate cuts seem to have soothed some seriously frayed nerves. Equities have bounced and complacency is back. It won't be long now before the next round of Bull raping time...

Below are all the economic releases in more detail.

S&P/Case-Shiller Home Prices Fell 9.1% in December (Update1): “Home prices in 20 U.S. metropolitan areas fell in December by the most on record, reflecting the deepening housing recession, a private survey showed today.

The S&P/Case-Shiller home-price index dropped 9.1 percent from December 2006, after a 7.7 percent decrease in November. Nationwide, home prices fell 8.9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of record keeping.

Prices may fall further as would-be buyers hold out for bargains and foreclosures add to the glut of unsold properties, extending the worst housing slump in a quarter century. Shrinking home values and credit restrictions threaten to reduce consumer spending and push the economy into a recession.

December's drop was the 12th monthly decline in a row and the biggest since the group began keeping year-over-year records on the 20-cities index in 2001.”

U.S. Home Foreclosures Jump 90% as Mortgages Reset (Update5): “Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages.

Repossessions rose 90 percent to 45,327 last month from the same period a year ago, according to RealtyTrac Inc., a seller of foreclosure statistics that has a database of more than 1 million properties. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.

Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records three years ago. About $460 billion of adjustable mortgages are scheduled to reset this year, raising minimum payments for borrowers, according to New York- based analysts at Citigroup Inc.

About $190 billion in subprime adjustable mortgages are slated to reset this year, according Mark Zandi, chief economist of Moody's

More than 233,000 properties were in some stage of default last month. Total filings increased 8 percent in January from December, RealtyTrac said today in a statement.”

Producer Prices in U.S. Increase More Than Forecast (Update4): “Prices paid to U.S. producers rose more than twice as much as forecast in January, pushed up by higher fuel, food and drug costs, signaling inflation may keep accelerating even as growth slows.

The 1 percent increase followed a 0.3 percent drop in December, the Labor Department said in Washington. The median forecast in a Bloomberg News survey of economists was for a 0.4 percent gain. Excluding food and energy, so-called core wholesale prices climbed 0.4 percent, the most in almost a year.

Combined with figures showing consumer prices also rose more than forecast, today's report may prompt the Federal Reserve to consider raising interest rates as soon as the economy stabilizes. Fed officials, including Governor Frederic Mishkin yesterday, have warned that higher prices may stoke inflation expectations.

Over the past 12 months, producer prices rose 7.4 percent, the most since October 1981. Wholesale prices excluding food and energy advanced 2.3 percent in the year through January.”

U.S. Consumer Confidence Declines to Five-Year Low (Update2): “Consumer confidence in the U.S. fell more than forecast in February to the lowest level since the start of the Iraq war as the labor market cooled and the economy faltered.

The Conference Board's index of confidence decreased to 75, the lowest since March 2003, from a revised 87.3 in January, the New York-based group said today. The employment outlook weakened and expectations for the next six months dropped to the lowest level since January 1991, the start of the Gulf War.

Americans are worrying more about the economy because the housing market is in its third year of a slump, employment has dropped, and gasoline and food prices are elevated. That may threaten consumer spending, which already has slowed, and further push down economic growth.”

FDIC: Quarterly Banking Profile: Report Headings:

-Quarterly Net Income Declines to a 16-Year Low
-One in Four Large Institutions Lost Money in the Fourth Quarter
-Margin Erosion Persists
-Full-Year Earnings Fall to Five-Year Low
-Net Charge-Off Rate Rises to Five-Year High
-Growth in Noncurrent Loans Accelerates
-Large Boost to Loss Reserves Fails to Stem Decline in Coverage Ratio

“At the end of 2007, there were 76 FDIC-insured commercial banks and savings institutions on the “Problem List,” with combined assets of $22.2 billion, up from 65 institutions with $18.5 billion at the end of the third quarter.”

FDIC to Add Staff as Bank Failures Loom: “The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.

-Out of Retirement: The FDIC is recruiting 25 of its retirees experienced in handling insolvent financial institutions.

-The Reasoning: The agency is preparing for an increase in failed financial institutions as the housing and credit markets worsen.

-What's Next: The FDIC will give an update today on the number of "problem" institutions that regulators are watching most closely.

-The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes." The division now has 223 employees, mostly based in Dallas.

The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement.

In public, policy makers are debating what role the government should play in trying to stabilize the housing market and minimize foreclosures. Meanwhile, regulators have worked discreetly behind the scenes to closely monitor the growing number of troubled banks and thrifts considered at risk.

"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.”

Tuesday, February 26, 2008

A Pop Above Resistance

Fun times. Late in the afternoon S&P saved MBIA from certain death. Ambac was not so lucky.

In classic fashion, the first headline to scroll across the new terminals was the reduction in rating of XL Capital, a smaller and less important bond insurer. Traders hit equities short with size, only to recoil in horror on the very next headline. The removal of MBIA from review trumps all. With ninja-like reflexes traders reversed their equity positions and cleared resistance around the 1367 area.

Equities are now positioned to challenge the 1396 area. Failure to hold the 1367 and 1371 area would result in a drift back down into the recent trading range.

MBIA Removed From Review at S&P, Ambac May Be Cut (Update4): “MBIA Inc., battling to stave off the crippling loss of its AAA credit rating, soared in New York Stock Exchange trading after Standard & Poor's said no downgrade of the bond insurer is imminent.

The insurer remains on negative outlook, meaning that any ratings move may be lower, though not any time soon, New York- based S&P said today in a statement. Ambac Financial Group Inc., which ranks second to MBIA among bond insurers, is being given more time to avoid a downgrade pending the outcome of company's plans to raise new capital, S&P said.”

Related Headlines:
MBIA Will Halt Asset-Backed Business, Split Units (Update3)
U.S. Home Foreclosures Jump 90% as Mortgages Reset (Update2)

Related Posts:
Bulls: Nothing But Failure

Monday, February 25, 2008

Monoline Bailouts: The Great Circle Jerk

On Friday, 15 minutes before the close CNBC’s Gasparino came on the air with ‘BREAKING NEWS’… right after these messages of course. He then proceeded to explain how a rescue package for Ambac may well be announced over the weekend, OR Monday OR Tuesday BUT that ‘it could still fall apart’. Either way, the shorts didn’t stick around to find out with only 15 minutes to the close and all that weekend headline risk. Equities went bid and peeled off the lows to close at the highs of the day.

Talk about meticulous timing. Fannie Mae (FNM) and Freddie Mac (FMC) were just downgraded in the morning. (In Fannie Mae, Freddie Mac ‘Closed The Gap’, Florida Screwed, I presented their charts predicted the price action that came to pass.)

Fannie Mae, Freddie Fall After Merrill Says `Sell' (Update2): “Fannie Mae and Freddie Mac fell in New York trading after Merrill Lynch & Co. analysts said the housing and debt market slumps will stifle earnings at the mortgage-finance companies through 2011.

The companies, which own or guarantee about 45 percent of the $11.5 trillion in U.S. residential mortgages outstanding, may need to raise more money to cope with loan defaults, the analysts wrote in a report today. Fannie Mae and Freddie Mac reported $3.4 billion in combined third-quarter losses and are expected next week to report similar results for the fourth-quarter.”

Then with equities at a critical support level, just about ready to slide into the abyss, (prices were below 1330 on the S&P) Gasparino’s cell rang and he was able to get the ‘good news’ out just before the close? How much you do you want to bet they had that story before the open on Friday with instructions to spill it just before the close? Nice setup though. Nice trap. Well played.

Ambac Rises as Banks Plan $3 Billion Rescue to Avert Downgrade: “Ambac Financial Group Inc. rose to the highest in a month on investor expectations the bond insurer may be rescued from crippling credit-rating downgrades by getting $3 billion in new capital.

Ambac, the second-biggest bond insurer after MBIA Inc., may announce an agreement this week, according to a person with knowledge of the discussions who declined to be named because the details aren't complete. The New York-based company plans to raise $2.5 billion by selling stock at a discount to existing shareholders and $500 million from issuing debt, the Wall Street Journal reported today, citing people familiar with the matter.”

First of all, $3 billion is nothing but a delaying tactic.

From The Big Picture: “The current rescue operation is for but $3B. This small sum is intriguing -- not just relative to the prior rumors. First, the duolines have potential exposure anywhere from $30 to $75 billion dollars. On top of that, the bank's counterparty and hedging exposure has been estimated at $150B to $200B. Can $3B really solve the problem?”

“Citigroup Inc. and seven other banks are working with Ambac to prevent rating cuts that would throw doubt on the credit quality of the $553 billion of municipal and asset-backed securities it guarantees. Banks stand to lose as much as $70 billion from any downgrades to Ambac, MBIA Inc. and FGIC Corp., Oppenheimer & Co. analysts estimated.”

Second the banks involved in the rescue package are the ones that would be hurt most by a monoline credit downgrade. These clowns would have the most to lose.

“New York Insurance Superintendent Eric Dinallo last month arranged a meeting with banks to help avoid a downgrade of the bond insurers. Dinallo told a congressional hearing this month that the companies may be forced to separate their municipal insurance business from their asset-backed guarantees.

Banks face losses from any rating cuts because they bought bond insurance to hedge the risks of collateralized debt obligations and other asset-backed securities that are now tumbling in value. CDOs package pools of securities then split them into pieces with different ratings.

UBS AG, Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA 9, BNP Paribas SA and Dresdner Bank AG were also involved in the group discussing a rescue, said the person.”

So let me get this straight: The monolines wrote BAD insurance. They basically under priced it because they misunderstood the RISKS. Therefore, they will take a hit on this BAD insurance. That can’t be helped. However, the hit would be so large it would be FATAL. The monolines would blow throw so much of their capital paying these claims that they would get DOWNGRADED and lose their TRIPLE ‘A’ rating. Some of the weaker monolines have ALREADY gone BANKRUPT.

Those financial institutions who have purchased this BAD insurance would have to write their insured holdings down to MARKET, because the insurance would be WORTHLESS.

So, in a bid to avoid this, the very financial institutions that have purchased this BAD insurance, are going to BAIL OUT the monolines. In this case Ambac. But all the monolines are swirling the drain with bailout rumours hovering like dirty vultures. Suppose this seven bank consortium does follow through on the bailout. They would inject capital into Ambac. Then when the insurance claims are triggered they would go back to Ambac and literally take their OWN MONEY BACK.

This would suck the capital right back out of Ambac and the result would be a write down in the value of their investments in Ambac.

This is just one massive, zero sum, circle jerk. You see, the insurance written was BAD. The lossess WILL be taken. They CANNOT be avoided. Bailout or not. Its just a matter of how and when. Propping up the monolines would just CHANGE and POSTPONE the write-down… but not necessarily their size. Ultimately, their will still be write-downs.

Related Headlines:
Auction-Rate Bonds Force `Predatory' Yields on Cities (Update3)
Recession in U.S. More Likely in 2008, Economists' Survey Finds

Related Posts:
The Monolines: Such A Slow Death
Fannie Mae, Freddie Mac ‘Closed The Gap’, Florida Screwed