tag:blogger.com,1999:blog-6798074091942701235.post6166451442837399721..comments2024-03-29T01:35:09.550-04:00Comments on Can Turtles Fly?: Moody's CDS-Derived Ratings Imply Lower Ratings for Ambac and MBIASivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-6798074091942701235.post-90267720989497936052008-06-01T13:35:00.000-04:002008-06-01T13:35:00.000-04:00No, I completely agree with you. That's why I wasn...No, I completely agree with you. That's why I wasn't really surprised. The CDS spreads have been elevated for over 6 months so if someone relied on that, well, that's old news. The real question is how correct it is in the long run. Business decisions shouldn't be made on them since using them is sort of like trying to a build a factory based on the stock price movement.<BR/><BR/>---------<BR/><BR/>Following up on your some items you mentioned in the prior comment...<BR/><BR/>MARKET CONSENSUS<BR/><BR/>I disagree with you and think the market is not pricing in more severe losses from second-liens (HELOC/CES). Ambac can potentially lose $10billion on that exposure alone (that's the superbear case of William Ackman and others). I'm just mentioning this because I think the stock price can come under pressure if Ambac posts more mark-to-market losses on those HELOCs. If the market priced all that in, further marks shouldn't weaken the stock price.<BR/><BR/>Having said that, I don't expect every single second-lien insured item to post a 100% loss. As you pointed out, only a few deals (Bear and Franklin for example) are posting huge losses, with some of the earlier vintages doing poorly but within the pessimistic market expectation.<BR/><BR/>MUNI DEFAULTS<BR/><BR/>Regarding your prior post about your concern with muni bond defaults, that is certainly something that will deteriorate. I'm not sure if you saw <A HREF="http://www.bloomberg.com/apps/news?pid=20601039&sid=aGP25Nnw2JlY&refer=home" REL="nofollow">this Bloomberg article mentioning how muni defaults have tripled</A>. Personally I am not so concerned with that because, if there is one thing that these bond insuers are experienced in that's pricing muni bonds. They have been doing it for decades, through some municipality crises in the late 70's, 80's and early 90's. As long as we don't get a high correlation, where a large number of municipalites default or go bankrupt at the same time, we should be fine. Remember, MBIA and Ambac sailed through the massive hurricane Katrina damages. MBIA also survived through the Eurotunnel default (closer to your home ;) ).<BR/><BR/>If you do end up with high number of muni defaults/bankruptcies at the same time, well, as you said, we are probably looking at a severe recession or almost-depression-like scenario and I have bigger problems than this investment...<BR/><BR/>MY OTHER CONCERN<BR/><BR/>If Ambac sails through the second-lien problems, my next concern would be student loans and auto loans (for MBIA it would be commercial real estate and credit card loans). Consumer credit is a shaky situation here in North America (large number of people living beyond their means on credit cards, car loans, etc). But Ambac's car loans, for example, were initially rated BBB on a depreciating asset so I imagine they priced it as such. In contrast, residential real estate was priced at AAA with an appreciating price assumption.<BR/><BR/><BR/>KEEP THE POSTS COMING :)<BR/><BR/>BTW, keep posting. I like to hear thoughts from long-term investors as well (better than those short-term momentum ones on the Yahoo Finance boards :) ). I had someone by the name of CAK posting here but haven't heard from him/her lately--hope he/she is ok. CAK <A HREF="http://finance.groups.yahoo.com/group/MBIABK/" REL="nofollow">pointed out this Yahoo Finance group message board </A>where some knowledgeable investors (both long and short) were posting but it is mostly dead these days (it requires registration). One of the points raised by a "bear" is that subordination levels (the amount by which the lower rated tranches take the losses first) are being erased. For what it's worth, this guy who was short the bond insurers supposedly took half his gains from the shorts and bought Ambac recently. When short-sellers switch positions, it is a good sign :). He/she also thinks that Ambac and MBIA estimates and reserves for HELOC/CES are good but he is concerned about CDOs. I haven't looked into the detail but he was saying that there were some CDOs rated junk but MBIA (don't think it was Ambac) didn't post reserves for a potential loss...Sivaram Vhttps://www.blogger.com/profile/06361276466660862882noreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-16863398338856652352008-06-01T09:33:00.000-04:002008-06-01T09:33:00.000-04:00This doesn't seem to be anything new. CDS spreads ...This doesn't seem to be anything new. CDS spreads have been at very elevated levels since the mortgage mess blew up. But they have been increasing rapidly for everyone not just MBIA or Ambac. Berkshire Hathaway has seen is' spreads sextuple. Are we seriously supposed te believe that company (almost no debt, about $36 billion cash and lost of free cashflow)is suddenly at an increased risk of bankruptcy?<BR/><BR/>CDS spreads may me a good indicator of trouble to come if they shoot up for a particular issue in an otherwise calm environment but in a panicking market they represent general fear and increased riskpremiums and not a problem at a particular entity.<BR/><BR/>Or am I missing something?Anonymousnoreply@blogger.com