naked capitalism

Caleb Mardini says:

But there is such a thing as a run on an insurer, in the form of claims any how. And that’s where the problem is. How does the company expect to raise that kind of money in a climate where companies like WAMU, Lehman, and Merril are facing tremendous troubles?

Just this week it was announced that the companies Mexican arm hopes to insure 140,000 Mexican mortgages by 2013. I hope they can fare better in the Mexican Housing market than they are in the U.S.

m says:

Yves: this should help answer the question why the Fed is adamant about not bailing out Lehman:

” China may cut its dollar holdings – CICC

China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation’s biggest investment banks.

The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world’s biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms’ debt, CICC Chief Economist Ha Jiming said in a report Thursday.

“The crisis has made Chinese officials realize it’s a bad idea to put all their eggs in one basket,” wrote Hong Kong-based Ha. “This will likely lead to greater diversification of foreign exchange reserve investments.”

Now let’s correlate this with another piece of news I saw today which incidentally disappeared within 15 minutes, this time again on Bloomberg:

Paulson Adamant No Money for Lehman, Fed Against It (Update1)

Treasury Secretary Henry Paulson is adamantly opposed to using government funds to aid Lehman Brothers Holdings Inc., and Federal Reserve officials are inclined to agree.

A person familiar with Paulson’s thinking said Wall Street has been aware of Lehman’s troubles for a long time and had time to prepare for any crisis at the company. The access Lehman has to loans from the central bank will allow an orderly process, the person said. Fed officials are aligned with the Treasury and have a strong predisposition against use of government money.

So, now we know what’s really going on. It’s not that the PPT suddenly has seen the light. The Chinese are threatening to finally pull the plug if their considerable Dollar holdings should be exposed to further inflationary action by the Feds. That would be a BAD thing – trust me. If that happens you can kiss the Dollar good-bye. And we already know from the FNM/FRE debacle that the Feds have no compunction about handing U.S. equity holders the shaft whilst protecting the interests of foreign debt holders like the Chinese, the Russians, the Japanese, etc.

THAT is why LEH won’t be handed to GS or BAC on a silver platter paired with a juicy Fed cash injection or some kind of creative asset swap for treasuries: The Chinese had enough and are threatening to start dumping Dollar assets if the Feds continue to running their printing presses whilst bailing out every investment bank in trouble (which is most of them). The market has been ‘pricing in’ bank failures at this point (just look at the last few days of market tape) and the Feds are now forced to draw a line in the sand. They would have never done this on their own account, that’s for sure.”

http://evilspeculator.com/

mxq says:

I’m not 100% sure, but i think AIG has to settle a lot of their security cds contracts by swapping cold hard cash for the outright instruments (which are at best illiquid and, at worst, worthless) as opposed to just paying the insured the difference.

They also have a lot (though unquantified) exposure to the European housing market (which Jeremy Grantham thinks is going down 40%, peak to trough).

This could get really really ugly.

Vermont Trader says:

Maybe AIG can start by selling Stowe, it’s ski area/executive enclave here in Vermont.

http://www.stowe.com

Many of the runs have great AIG names like Starr…..

Matt Dubuque says:

The scenarios worsen markedly if a ratings downgrade comes for AIG. It’s harder to raise capital and harder to finance their holdings. And the mood of the ratings agencies has been rather sour lately.

As a tremendously important player/market maker in the CDS market, they are also exposed to far greater risk than some of the other insurers.

For a number of reasons, I think their downfall would be every bit as traumatic as an LEH collapse, likely more so. There is indeed heavy smoke coming from the gunpowder factory.

In terms of the Fed, I think M is clearly correct in his view about their overall objective here. I would add that the Fed is a public/private hybrid and will act in their OWN self-interest to protect the value of their Treasury holdings.

Matt Dubuque