naked capitalism

Anonymous says:

OT: As a result of FDA and USDA’s comprehensive investigation, on February 6, 2008, FDA announced that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine.

http://www.fda.gov/oc/opacom/hottopics/petfood.html

realty-based lawyer says:

Yves-

Do you know where I can get a copy of the presentation? Or, if permitted, could you send it to me at RBLawyer at gmail.com?

From your excerpts, it seems that he’s proposing essentially to structurally subordinate SF claims to muni claims by setting up a subsidiary of the current insurer, capitalizing it somehow (new capital?) and transferring the muni policies to the new subsidiary (how, I don’t know). Not sure that works.

The reserve issue you mention is also a problem.

The proposal I sent you yesterday may be a simpler and more effective way to support the muni business without penalizing the SF business….

S says:

Municipalities don;t underright anything? They gonly care about a lower cost of capital and this in theory achieves it. It is kindof ironic that he is essentially proposing a waterfall CDO/CMO structure to solve what is a waterfall problem. The most expediant and efficent solution is to get the Muni business earning ASAP and that is in the best interest of the SF counterparties unles they think they get a full scale govt bailout. That is probably what they want in the end and the question is will the feds cave. Although if the LBO losses come and CMBS falls down, any incremental reserve contribution will be difficult. I suppose if i were a bank why not stonewall and await what they know will be forthcoming. Problem here is nobody has an incentive to settle.

dwell says:

People . . . People . . . why does anyone take anything Ackman says seriously? He is TALKING HIS OWN BOOK! In his most recent proposal, please note that the only really effective outcome he has ensured is the destruction of the holding company equity value. This has been, is, and will remain his primary directive. Nothing this jamoke proposes should be viewed through any prism other than that reflecting his portfolio.

Another and very interesting point that has been ignored by seemingly everyone is that unless MBI/ABK/Etc. file for bankruptcy, Ackman’s firm probably is toast. Long a motley group that includes Borders (BGP, -52% in 2007), Barnes & Noble (BKS, -13%), Sears (SHLD, -39%) and Target (TGT, -12%), Ackman was up 22% in 2007 primarily because he was short stock, long puts and long CDS in the insurer space. In fact, from what can be gleaned from commentary, including his own, Ackman appears to represent a substantial amount of the CDS exposure in the insurer space. Therefore, if MBI and ABK don’t implode, those CDS and derivative positions will be donuts and Ackman will be out of business . . . again. He NEEDS MBI and ABK to disappear or he will find himself on the wrong side of The Street.

Keep this in mind the next time you give any sort of academic credence to his commentary or proposals.

Anonymous says:

Sure Ackman is talking his own book.

However nothing from his proposal strips value from the holding companies. With his proposal if by some chance the insurers continue producing profits then that income will eventually be downstreamed to the holding companies.

Yves Smith says:

Anon of 5:12 PM,

There are two different issues here. One is that muni guarantees are fundamentally a ripoff, and I agree. But I don’t know how we get rid of them. Look at what happened in the auction rate securities market. Put the guarantee at risk and suddenly no one wants the paper.

Most of this is irrational, but muni bonds are the ultimate retail product, and you have quite a few unsophisticated buyers.

There is one segment of the market for which the insurance is a sensible product: entities that have sufficiently small fundraisings that buying a guarantee is cheaper than paying for a bond rating.

The second issue is “why should the munis suffer because of the SF business?” Well, aside from the fact that the regulators were dumb enough to let the insurers write it, the SF policyholders may be every bit as entitled to the full value of the insurer reserves as the muni holders. Remember, we operate under a society of law, You can’t change contracts just because you don’t like the outcome.

I haven’t gotten a clear reading on this issue. The prevailing opinion seems to be that the SF policyholders entered into their contracts assuming the monoline’s balance sheet was there for them. There appears to be no basis in the law for preferring one group of policyholders to another. The only way out may be that the SF product was written via a slightly different structure (the so-called transformers); the firms and regulators may be able to argue that that makes the SF policyholders subordinate to the ones who had their guarantees written directly. Again, not sure this argument holds water.

Finally, if you tank the enough bank equity by being cavalier about the SF guarantees, you hurt the economy. There is not a high road through this mess.

Yves Smith says:

The argument isn’t that it’s worthless, it’s that it costs too much and the munis would do better economically not being insured (ie, it’s cheaper for them to pay the higher interest rate than the insurance premiums). Munis are rated much more harshly than corporate issuers. I don’t have the stats readily at hand, but the gap is pretty large, not a percentage or two. If munis were rated the same way corporations were, you’d see big increase in the number of AAA and AA credits.

And given the worsening outlook for government finances, the cost of insurance is rising. per your Buffett comment.