Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Nye Lavalle
October 22, 2007 3:24 p.m.
By Lavonne Kuykendall

CHICAGO (Dow Jones)--As mortgage loan defaults spread from subprime loans to the prime market, mortgage insurers at the front line of covering home loan losses are likely to see their earnings hammered for at least another year, making for a more dismal outlook than many expected even a few months ago.

Mortgage insurer MGIC Investment Corp. (MTG) noted the worsening environment Friday when it reported a net loss of $372.5 million. It said it will likely be 2009 before the company is able to report a profit.

The pain is spreading to other mortgage insurers, with Old Republic International (ORI) becoming the latest to get a downgrade from an analyst in advance of its third quarter earnings report, due Thursday. "We struggle to see a scenario in which the shares outperform over the next 6-12 months," said Fox-Pitt, Kelton Cochran Caronia Waller analyst Matthew Carletti in the Monday note downgrading Old Republic to in line from outperform.

A Standard & Poor's report Friday called it "probable, though not certain" that all seven of the largest mortgage insurers will report underwriting losses next year, as bad loans continue to result in claims to the insurers that can amount to as much as 35% of the loan's value.

"If one will report profitability it will be Genworth, but we expect underwriting losses for all of them," said James Brender, a Standard and Poor's director and author of the mortgage insurer report. The current housing environment is "almost the test of a lifetime," Brender said, but he added that the mortgage insurers have capital to carry them through the downturn.

The ratings agency put both MGIC Investment and PMI Group Inc. (PMI) on credit watch with negative implications after both reported higher-than-expected losses. Standard and Poor's said that it did not expect ratings to fall below double-A-minus for any of the insurers, which are now all rated double A, except for American International Group's (AIG) United Guaranty, which is rated double-A-plus.

So far, share prices for the monoline mortgage insurers - PMI Group, Radian Group Inc. (RDN), MGIC Investment and Triad Guaranty Inc. (TGIC) - have fallen the most since the beginning of the year, while Old Republic, Genworth Financial (GNW) and American International Group's more diversified businesses have fared a bit better.

Brender expects the housing downturn to bottom out in the third quarter of 2008, and he sees the insurers returning to profitability in 2009.

October 25, 2007 2:37 p.m.

Financial guarantor MBIA Inc. (MBI) said Thursday it cut the market value of its credit derivatives portfolio, resulting in a third-quarter loss and raising fears among investors that the market value declines could be reflective of eventual losses.

Rising defaults amid a weakening housing market have inflamed concerns over the performance of mortgages written in the past few years, helping drive MBIA's share price down to its lowest point in more than four years Thursday. Shares were off 13% at $47.81 in mid-afternoon trading, leading a broader selloff among mortgage and bond insurers.

The Armonk, N.Y., financial guarantor and provider of specialized financial services swung to a third-quarter net loss, as the market value of its credit derivatives dropped $352.4 million.

The company's net loss was $36.6 million, or 29 cents a share, compared with net income of $217.9 million, or $1.59 a share, in the year-earlier quarter. Operating earnings, which don't take into account the unrealized mark-to-market losses, were $1.52 a share, compared with $1.55 a share a year earlier. Analysts surveyed by Thomson Financial expected earnings of $1.59 a share.

MBIA took pains to explain that the mark-to-market losses reflect the price the securities might garner if they were sold in the quarter rather than their expected eventual performance. But several participants on the company's third quarter conference call Thursday questioned whether the market value might be an indicator that future performance would fall short of expectations.

"So far, the markets have been right," said one caller who asked MBIA executives at what point they might be concerned about taking actual losses on the portfolio of securities.

Share Buybacks Discontinued

MBIA added to the concern when it said it had suspended its share buyback program, under which it still has $340 million left to spend. Chuck Chaplin, the company's chief financial officer, said during the call that "free-floating anxiety" hovers over the state of the housing market.

Chaplin went into detail on how MBIA's means for marking its credit derivatives portfolio to market price differed from that used by investment bank Merrill Lynch & Co. (MER), which on Wednesday reported a much bigger than anticipated $7.9 billion write-down from its derivatives and subprime mortgage exposures.

"In broad terms, the biggest impact is the structure, our interest in the underlying collateral is different than the party that owns outright" the loans and securities, he said.

Though MBIA had a big mark-to-market loss, it didn't follow the lead of some other financial guarantors in pre-announcing its results to give investors some warning of the effects of falling prices for securities backed by mortgage loans.

Morgan Stanley analyst Ken A. Zerbe said in a research note MBIA's mark-to-market losses were "well above the $175 million we had expected given the recent preannouncements by its peers." He noted, however, that MBIA's write-down was just over 2%, "considerably below the 19% write-down Merrill Lynch took on its high-grade CDO portfolio."

Investors were clearly skeptical that financial guarantors have the wherewithal to deal with the worsening situation in the credit markets. Shares of several mortgage and bond insurers hit a 52-week low Thursday, with losses growing after news that the riskiest slice of the subprime mortgage-based ABX derivative index - a surrogate for the value of securities backed by subprime mortgages - hit a record low.

Shares of MBIA rival Ambac Financial Group (ABK), which said Wednesday it had marked down the value of its derivatives portfolio by $743 million, plunged 12% to $45.01 Thursday. Triad Guaranty (TGIC) shares fell 30% to $5.76 after the company raised reserves against expecected losses from subprime loans. Shares of mortgage insurer MGIC Investment Corp. (MTG) fell 14% to $17.03 after the company cut its dividend by 90%.

Exploring SIV Options

MBIA also reported Thursday a $1.8 billion structured investment vehicle named Hudson-Thames, which MBIA manages as part of its advisory services segment. The company said Hudson-Thames is seeking alternative solutions to address its financing needs, "given the challenges in the structured finance and asset-backed commercial paper markets." MBIA said it has invested $15.8 million in the capital notes of the Hudson-Thames SIV, which is 12% of the capital notes, adding that it has no obligation to provide liquidity support or credit guarantees to the SIV. Capital notes rank low in SIVs' capital structures and could be the first to bear losses.

SIVs sell short-term debt and then use the proceeds to buy longer-term, higher-yielding securities, such as mortgage bonds and other asset-backed securities. But SIVs have had trouble in recent months selling debt, and some of their roughly $350 billion in assets are backed by U.S. mortgages. U.S. Treasury Secretary Henry Paulson has organized a plan to have banks create a large fund to purchase the assets of certain troubled SIVs, with the aim of preventing the funds from rapidly selling off troubled assets at fire-sale prices that could spark further market turmoil.

Signs Of Business Improvement

Despite the concerns about the impact of credit market volatility, MBIA's results gave some sign that business is picking up.

For the third quarter, MBIA's global public finance, which includes bonds insured for big government projects such as toll roads and electric utility projects, showed adjusted direct premiums rose 78% from the year ago quarter, to $176.5 million.

Global structured finance tripled to $337.7 million, its highest level in company history, on an uptick in both volume and pricing, the company said.

Several sectors contributed to the increase in global structured finance production, with increases from commercial mortgage-backed securities pools, collateralized debt obligations of investment grade corporate credits, commercial mortgage-backed securities pools and multisector CDOs, as well as a whole business securitization.

Breaking Up Is Hard to Do
Citigroup's Woes Prompt
Thought of Dumping Assets;
Will Prince Be the Fall Guy?
November 2, 2007

Citigroup boss Charles Prince has long defended the bank's conglomerate structure, as has his board. That might soon change, but not to appease shareholders wanting the bank to free the value locked up in its component parts. It is the sorry-looking state of Citi's capital base that could force the issue.

All of Citi's capital ratios have fallen -- tier one, at 7.4%, is even below Citi's target, although the bank says it is taking steps to improve that. But the offending one is what accountants call tangible equity to tangible assets. That now stands at just 2.8%, almost half the level of its peer group, according to CIBC World Markets.

What happened? It has less to do with what Mr. Prince dubbed Citi's aberrational third-quarter results, and their more than $6 billion of write-downs and increased reserves against future credit losses. Rather it was the $28 billion spending spree he embarked on after the Federal Reserve lifted its ban on Citi making acquisitions early last year. These, including Nikko Securities and Federated's credit-card loan portfolio, have added assets, but insufficiently boosted earnings. As a result, in the 18 months to June, the ratio had already declined by a third.

What's the problem with it being so low? This ratio is regarded by many investors as the cleanest measure of a bank's financial condition, and as an indication of how much cash it has on hand to invest in its business. And it could fall further if Citi has to book more write-downs or set aside more for losses -- or even finance some of the $80 billion managed by its stumbling structured investment vehicles.

Citi has already suspended buying back shares. But CIBC's Meredith Whitney figures it needs to raise more than $30 billion to get back within shouting distance of peers. The options for doing so aren't attractive.

Citi could offload a chunk of its credit card and car loans, or mortgages -- but getting good prices for such assets is hardly easy right now. It could carve into its $10 billion in annual dividends -- but that would prompt investors to dump Citi stock, which has fallen 30% already this year. Or it could raise new equity -- but at a depressed price.

That's why breaking Citi up might be the least of the worst options. If its Smith Barney brokerage were to fetch the 2.2 times trailing revenue that A.G. Edwards received, Citi could pick up about $27 billion. But to be forced into such a strategic volte-face comes with another cost: the head of the CEO who got Citi there and resisted a breakup when the timing was right.

Ominous Crunching

The credit crunch has U.S. investors spooked. Sure, there was blame to go around for yesterday's 2.6% market slide. The main suspects were Citigroup's downgrade by analysts, Exxon Mobil's lower profits and worries that the Fed won't continue easing. But the firms most exposed to the crunch suffered the biggest drubbing.

Bond insurers plummeted. Ambac Financial and MBIA were off more than 19% and 11%, respectively. Fortress Investment Group, which has mortgage-related investments, fell 11%. Radian Group, the mortgage insurer whose losses helped touch off the rout, fell more than 13%. Citigroup itself fell nearly 7%.

Was all that justified? Well, there have been some encouraging signs in the credit markets. Interest rates have fallen and the commercial paper market is showing life. Banks have moved some formerly hung leveraged loans off their books at better-than-expected prices. But the real credit boogeyman lurked in the huge, hard-to-value exposures to mortgage collateralized debt obligations. They accounted for the bulk of banks' third-quarter write-downs.

Investors generally greeted those cheerfully, thinking the banks had cleaned house. Their confidence is now shaken. It should be. The crunch is likely to claim more victims.
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The whole idea that insurers were unaware of when the last viable hand was going to be dealt is utterly ludicrous.

When you play one-on-one with a blackjack dealer and one deck of cards, you have a viable chance of walking away ahead.  But these scammers got ten of their pals in on the game and loaded it with extra decks and then influenced the game with their strength in Washington.

It's been the "get in, get your $ and get out" business model and it always works for those who guessed right.

Ten years from now the power players will be sitting on their yachts sipping scotch and lamenting the fact that it didn't run long enough to let them get an entire island.
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Shaggy Rogers
MBIA Bond Risk Soars on $8.1 Billion CDO Disclosure (Update2)

By Shannon D. Harrington and Christine Richard

Dec. 20 (Bloomberg) -- MBIA Inc. fell the most since 1987 in New York trading after the world's biggest bond insurer disclosed that it guarantees $8.1 billion of collateralized debt obligations that investors say have a greater chance of losses.

``We are shocked management withheld this information for as long as it did,'' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. ``MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.''

MBIA, Ambac Financial Group Inc., and other insurers are being reviewed by credit-rating companies on concern they don't have enough capital to cover potential losses stemming from mounting downgrades of the securities they guarantee. If the bond insurers are cut, it would likely mean that more than $2 trillion of securities they back would lose their AAA ratings.

MBIA fell $7.38, or 27 percent, to $19.63 at 12:25 p.m. in New York Stock Exchange composite trading.

The company posted a document on its Web site late yesterday showing it insured $8.1 billion of so-called CDOs-squared, which repackage other CDOs and securities linked to subprime mortgages. Rising delinquencies on subprime loans contributed to downgrades on 2,007 CDOs last month alone, according to Morgan Stanley.

The disclosure followed Standard & Poor's decision yesterday to lower its outlook to negative for the AAA ratings of the bond insurance units of Armonk, New York-based MBIA and Ambac following a stress test of company capital. A telephone call to Elizabeth James, a MBIA spokeswoman, wasn't returned.

Shattered Confidence

The $30 billion of exposure for MBIA Insurance to CDOs linked to residential mortgage-backed securities that S&P listed in its report yesterday includes the CDOs-squared disclosed by MBIA, S&P said in a statement today in response to investor inquiries.

``How is confidence expected to return to the capital markets when these types of surprises continue to pop up?'' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.

The perceived risk of MBIA defaulting on its bonds soared as much as 145 basis points to 625 basis points, the widest on record, before narrowing to 575 basis points, according to credit- default swap prices from CMA Datavision in London.

Contracts on MBIA's bond insurer, MBIA Insurance, climbed 95 basis points, the most in at least a year, to 340 basis points, CMA prices show. That means it costs $340,000 a year to protect $10 million in MBIA Insurance bonds from default for five years.

Stress Test

S&P ran a stress test to determine the losses bond insurers would take on securities backed by subprime mortgages, including CDOs. Losses were projected at $3.1 billion for MBIA, $1.8 billion for Ambac, and $2.2 billion for Financial Guaranty Insurance Co.

MBIA's higher loss potential was attributed to the company's guarantees on securities backed by home equity loans, S&P said.

MBIA Insurance stands behind about $652 billion of municipal and structured finance bonds. Ambac insures $546 billion of debt.

The Markit CDX North America Investment Grade Index, a benchmark credit-default swap index linked to the bonds of 125 companies, including MBIA Insurance, rose 0.25 basis point to 77.75 basis points as of 10:48 a.m. in New York and earlier reached 78.25 basis points, according to Deutsche Bank AG.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Contracts tied to Ambac rose 30 basis points to 595 basis points, according to CMA.

Merrill Lynch

MBIA's disclosure explains why S&P and Moody's Investors Service turned more negative on the industry in recent weeks, Zerbe said. Last month, Moody's said MBIA was ``unlikely'' to fall below its target capital level for an AAA bond insurer despite downgrades of securities backed by subprime mortgages. Ambac had been flagged as ``moderately'' likely to need more capital.

``This disclosure completely changes our view of MBIA being a more conservative underwriter relative to Ambac,'' Zerbe wrote.

CDOs have accounted for the biggest portion of the more than $70 billion in writedowns in the past two quarters at the world's biggest banks. CDOs-squared have lost the most on a percentage basis among CDOs linked to subprime mortgages, New York-based Merrill Lynch & Co.'s third-quarter disclosures showed.

When announcing it would write down top classes of CDOs by $5.8 billion in the third quarter, Merrill cut the value of CDOs- squared by $800 million, leaving it with $600 million of ``net exposure.''

Other securities firms including New York-based Citigroup Inc., Morgan Stanley and UBS AG have reported larger fourth- quarter CDO losses.

S&P yesterday cut its A rating on bond insurer ACA Financial Guaranty Corp., which as of June 30 had sold protection to 31 counterparties through credit-default swaps on $61 billion of highly rated securities, including CDOs backed by subprime mortgage bonds, according to filings.

To contact the reporters on this story: Shannon D. Harrington in New York at ; Christine Richard in New York at .

Last Updated: December 20, 2007 12:29 EST

Bond giant's $8.1 billion surprise
MBIA details CDO exposure
MBIA Skids on CDO Disclosure Wall Street Journal
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I have to admit I am experiencing a certain amount of pleasure watching
the big guns and Citi in particular squirm in quiet desperation.

It does sound familiar.

I can just hear investors, Why on earth did they take on too much debt
and then lie about it?  Oh, they are used to lying.

When investors move on them, they are going to experience the same
thing we do.  Desperation.  Trying everything in the book to stop the
bleeding.  They are breaking their necks to get liquid.

Just like borrowers trying to stop foreclosure.

They reap what they sow.


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Come on now, can't you see it? It's as plain as the nose on their face!

They are deadbeats.
They took on more debt than they could afford.
They just want to blame others for their failure.
They are blaming us for their inability to pay their debt.
They are just trying to avoid meeting their obligations.

Oh, wait. I am sorry. This is how they describe MS Fraud victims. After all, we are the unsophisticated ones. They don't make bad investments...
My mistake!

Semper Gumby!

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And then this happens...

Morgan Stanley bailed out by Beijing after $9bn write-off
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Much of the fall of the capital markets was predictable, and was correctly predicted a few years ago, the acknowledgment by President Bush today that many mortgage holders don't know who owns the note or mortgage is finally an admission to the national security interests at stake!  He finally got it!  But I'm afraid its too late.
For the first time in our history, reinsurance is being called in!!! to cover the primary insurance companies!! A number of articles have already been written on this in recent days and weeks.  More will be forth coming.  Look out! We may find our selves in a free fall after the first of the year when Bonds are called in for cash!  I think the Central banks are already worried about this and have been flooding the banks with cash.
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Nye Lavalle
Where did Bush talk about who owns mortgage and note Gary? Trying to find?
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Nye, it was today during an news conference, I can get a copy of it and try and post it tomorrow it you like.

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I agree with you Gary about the security risk.

This is what the founding fathers warned about greatly that economic and monetary manipulation was a greater threat than a military threat.
How can we defend our national interests and defend our interests in trade agreements particularly monetary manipulation to strip our assets and undercut exports if we are supported by other countries and we do not even have our own manufacturing or energy?

The world is not going to pay us tens times the wages of third world countries to consume and borrow they can do that fine themselves.
Our military is geared to high, cost high tech superiority if we have limited troop numbers and our hardware is worn out most of our air force is decades old then how could we engage in global conflict?

Our enemies can just cause us to spend ourselves into defeat buy up what's left for cheap with our current strategy.
Security starts with a sound economy and domestic unity.

In California there is a massive exodus of working, law abiding citizens and a massive influx of poor immigrants mostly illegal.

Here's Arnold's brilliant plan to solve the crises caused by mortgage fraud.

Subprime Crisis Claims California: Arnold to Declare Fiscal Emergency
posted on: December 16, 2007  
Print Email

The inevitable has happened, and, as tipped here previously, California governor Schwarzenegger has conceded that the state budget deficit is ballooning to record levels. From forecasting breakeven, as of last August, the state is now saying that it is looking at a whopping $14-billion shortfall in 2008, up from the $10-billion forecast of a scant few months ago.

How big is that deficit? It is the size of the California prison system budget plus the cost of running the sprawling University of California schools. Turns out that a stalling economy, plus collapsing real estate are a pretty serious whack on the state's financial head.

Arnold says he will declare a fiscal emergency in the state, which requires the state to drop all other business and find an immediate solution. The options, however, are both simple and not-so-simple: cut spending, or increase taxes. The latter is awfully difficult to imagine, as it will require support from Republicans in the state legislature, which seems unlikely. That, of course, makes cost cuts a high probability outcome, which will be very, very unpleasant.

Arnold appeared on the news and said he would have a plan for the fiscal emergency that had to do with health care and then unvealed a plan to pay for health care for illegal immigrants that in Arnolds words would solve the fiscal crises caused by criminal lenders by "Mr. Schwarzenegger argues that the health plan is intended to bring down costs by encouraging healthy habits, better management of chronic diseases and electronic record-keeping. That, he says, should help California fix its structural budget problems"

There is massive exodus of taxpaying, law abiding citizens as they are driven out by the illegal immigrants and a massive influx of illegal immigrants often violent anti-Americans who are sometimes allies with Arab and Muslim anti-American elements. How can it help our economy to flood California with immigrants who must be subsidized?

A collapsing economy coupled with inviting and supporting tens of millions of illegal immigrants who are often anti-American
sounds like far greater threat any conceivable overseas threat.

Now DHS and Congress want to gut border security and spend the money allocated in the border fence act on pork barrel and at the same time passing the H.R. 1955 and S. 1959 homegrown terrorists acts sponsored by Roland Arnall's Simon Wiesenthal group and focus on U.S. citizens as the true terrorists.

These politicians are only addressing mortgage fraud issues because after covering it up year after year telling us everything is fine while we can look outside coast to cost and see foreclosed homes all over and see that it is not they are forced to.

The damage is already done and the banks are insolvent so the inertia is for the house of cards economy to continue to collapse.

I want to see the Bush statement on the note too.

The bottom line is though, the politicians have been distracting us with secondary (even though important) issues while looting our economy which is the greatest threat of all, and flooding our country with tens of millions of potential terrorists which is bankrupting us even outside the  security risk.

Why can't they just enforce the laws we have had on the books since the beginning of the country?

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Nye Lavalle
please Gary, I have looked high and low for it
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Bush had a 10:30 AM conference on Fox TV yesterday.  I haven't looked on Fox to see if they have it posted.  I recorded it.

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Nye Lavalle
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Credit Default Swaps: The Clock is Ticking

posted on: December 21, 2007
The evaporation of the collateralized loan obligation market may be the other shoe dropping. The risks posed by credit default swaps (CDSs) may be not just the other shoe, but the neutron bomb. The rating cut by S&P of ACA Financial Guaranty Corporation (ACA) (from A to CCC), discussed in this article in yesterday's NY Times, may portend deep trouble.

Credit default swaps originated as a form of credit protection that the holder of a credit risk could purchase as a hedge against a borrower's default. A holder of General Motors (GM) bonds, for example, can effectively insure against a default by GM by purchasing protection in the form of a CDS from a willing counterparty. Many holders of collateralized debt obligations that have recently plummeted in value had hedged their positions through CDSs, and ACA Financial has been a major seller of such protection. An accompanying article in the Times describes possible efforts by some of ACA's insureds, including Merrill Lynch (MER), CIBC and Bear Stearns (BSC), to help bail out ACA in order to avoid a write-down of billions of dollars of insured securities.

As with so many other types of innovative financial products, CDSs have exploded in the past few years. They have become a simple way for investors to take long or short positions on particular companies or industries without having to buy or sell the actual underlying bank debt or securities. The notional amount of underlying obligations covered by CDSs now exceeds $40 trillion, up from less than $2 trillion in 2002.

In a low default environment, selling default protection through CDSs presented huge revenue opportunities. ACA more than doubled its CDS business over the past 12 months, and others have undoubtedly done likewise. However, if the events of the past several months have proven one thing, it is that investors have done a very poor job recently of accurately assessing and pricing risk. It is more likely than not that many CDS sellers have not properly gauged their exposure, or set aside sufficient reserves against it.

The potential ramifications are difficult to overstate. S&P contends that ACA is facing close to $3 billion of losses on its CDS exposures, for which it has only $650 million of reserved capital. There is no way to tell right now how many other banks, funds, and other insurers are similarly exposed. Of equal concern are the exposures of the CDS purchasers who believe themselves to be properly hedged against losses, but who may instead find their protection to be worthless because of their counterparty's inability to pay.

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ACA Insurance Unit Taken Over By Maryland Regulators  12/27/07

ACA Capital Cedes to Regulators The Associated Press 
NEW YORK (AP) — A recent deal with its state regulator has allowed ACA Capital Holdings Inc. to continue operating its bond insurance unit, ...
ACA Gives Control to Regulator to Avert Bankruptcy (Update5) Bloomberg
ACA insurance unit taken over by Maryland regulators Reuters
ACA in Deal for Credit Leeway Wall Street Journal
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MGIC is now fighting for its life, sell orders for after the first of January, and recent lowering of ratings, and the companies failure to  be meeting its sales goals, seem certain to doom MGIC.  Just how long current investors are going to accept the reverse leadership of the current management team is any ones guess.
The recent sales of Sherman Capital, and Litton Loan, have not benefited any stockholders, only creditors. 
Maybe too much golf with bankers and wall street guys is not a good thing!  And where is that Rolls Royce? and did the stock holders pay or it in any why. 
I'm expecting MGIC stock to fall after the first of the year to around where RADIAN is currently. 
Maybe Curt its time for some new products from MGIC within the insurance business model, I'm betting Old Republic will or could push this.  Otherwise, lay offs and continued selling of assets is most certain to occur.
Oh, how is that dealing with the IRS problem going?  is it really over 800 million?
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Warren Buffet to open his own insurance bonding company!  WOW 

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Shaggy Rogers
Financial Sense Online, CA 
BY ROB KIRBY     12.31.2007

Since this is New Year’s Eve, let’s all hoist one for the Oracle of Omaha – shall we? On Friday the Oracle’s Berkshire Hathaway announced it was purchasing the reinsurance unit of ING [NRG] for 435.7 million in cash and also notified the free world that it expected to be granted a license Monday [today] to open a new bond insurance business – Berkshire Hathaway Assurance Corporation.

Maybe it’s just me but doesn’t this announcement – coming on a Friday with the expected granting of a license by regulators on Monday reek of shotgun marriage?

The folks over at the Financial Times seem to think so:

Bond insurers feel heat as Buffett enters sector
By Andrea Felsted in London and Aline van Duyn in New York
Published: December 28 2007 10:25

……Berkshire Hathaway Assurance Corporation [BHAC], as first reported by the Wall Street Journal, will guarantee the bonds that cities, counties and states use to finance public infrastructure projects. The group will also look for opportunities to offer re-insurance to other insurers of municipal bonds.

BHAC hopes to win a triple-A credit rating and has pledged to maintain a capital ratio stronger than its rivals’. It plans to charge fees that reflect its financial strength and to avoid insuring structured products, including bonds backed by assets such as mortgages.

If MBIA and Ambac were to lose their triple-A ratings, it would send shock waves through the financial system, as many of the bonds they guarantee are owned by banks and other financial institutions.

Fitch has given MBIA and Ambac about four weeks each to raise $1bn in extra capital or risk losing their triple-A ratings.

The New York State Insurance Department has fast-tracked BHAC’s application, to facilitate the entry of a new player.

So who just who are these companies MBIA and Ambac anyway – and why exactly is it so important that the establishment of a better capitalized, Buffett led replacement be expedited?

MBIA and Ambac [along with FSI and FGIC] are integral parts of a clique of monoline bond insurers affectionately known as “the BIG 4”.

Recent Developments Further Muddied Already Murky Waters

Recently, the rapidly deteriorating financial condition of ACA Financial Guaranty Corporation [largely brought about due to exposure to Credit Default Swaps entered into with Canadain Bank CIBC] led ratings agency S & P to downgrade ACA’s credit rating from investment grade [A] to non-investment grade or “junk status” [CCC].

This becomes problematic because ACA Capital Holdings Inc. also provides financial guaranty insurance [bond insurance] on municipal obligations, asset-backed and corporate financings, bank certificates of deposit and surety risks through its insurance subsidiary.

So the downgrading of ACA means that the insurance given to municipal bonds and derivatives is also downgraded. This amounts to a downgrading the assets themselves because these assets are typically rated the same as their underlying insurer.

The Repeal of the Glass – Steagall Act

As the example above highlights, downgrades in modern debt based systems can and often do have systemic consequences.

Historically [post 1929 – 1999], regulatory statutes like the Glass-Steagall Act of 1933 separated [silo] banking activities according to their business [commercial and investment banking versus, say, insurance].

The silo-ing of these traditional financial activities was intended to serve as nature fire-breaks or safe-guards to systemic events.

This act was repealed in 1999, largely at the behest of former Fed Reserve Chairman Sir Alan Greenspan who was a champion of increasingly blurred lines between traditional lines of financing activities through the meteoric adoption of derivatives and structured finance which the ‘Black Knight’ frequently argued [circa 2004] provided ‘flexibility’,

“Deregulation and the newer information technologies have joined, in the United States and elsewhere, to advance financial flexibility, which in the end may be the most important contributor to the evident significant gains in economic stability over the past two decades…... “

…..”Financial derivatives, more generally, have grown throughout the world at a phenomenal rate of 17 percent per year over the past decade…..”

Make no mistake – today’s sub-prime / CDO / ABCP / SIV etc., etc. debacle is a derivatives induced event – a direct descendant of Sir Alan of Magoo’s attempts to repeal the business cycle [this same ludicrous flight to flexibility that is now being piloted by ‘helicopter’ Ben Bernanke].

Now Back to the Future

The ramifications of the downgrade of ACA were not lost on some of ACA’s largest customers [Merrill Lynch and Bear Stearns] who tried in vain to postpone S & P’s downgrade by proposing a rescue [recapitalization] package prior to the downgrade:

            Merrill Lynch, Bear Stearns in talks to rescue ACA Capital, New York Times says
            December 19, 2007

Bear Stearns and Merrill Lynch are among several major banks in talks to bail out ACA Capital Holdings, a bond insurance company that has guaranteed $26 billion in mortgage securities, the New York Times reported, citing two people familiar with the situation.

If ACA Capital’s financial guarantor subsidiary loses its A rating, the banks that insured securities with it would have to take back billions in losses from ACA as part of their credit protection agreement, the Times said.

Had S & P only downgraded ACA we probably wouldn’t be having this discussion right now.

But we are having this discussion now.

S & P did not only downgrade ACA.

Perhaps feeling a little bit ‘snake bitten’ with their negligent failure to adequately / prudently rate most of the securitized sub-prime mortgage paper that got the ball rolling in the first place; having ‘found religion’, they went on to place AAA rated Financial Guaranty Insurance Co. [FGIC] on negative credit watch meaning there is a 1 in 2 chance of a rating downgrade in the next 13 weeks.

They also placed Ambac, MBIA and XL Capital Assurance on a negative outlook. This means the chances of a downgrade in the next 24 months is 1 in 3.

So there you have it folks, three quarters of the “Big 4” are all facing downgrades. If they are downgraded, so are the ratings on the outstanding CDS [Credit Default Swaps] and Muni Bonds issued by local governments that they insured; but perhaps more importantly, that means higher yields on Muni debt issues going forward.

So how big is the Muni Bond Market you might ask?

            How big is the market?

The municipal bond market is one of the world’s largest and most remarkable securities markets. Approximately $1.7 trillion worth of municipal bonds are currently in the hands of investors. There are more than 50,000 state and local entities which issue municipal securities, and 2 million separate bond issues outstanding……

….Municipal bonds historically have been an exceptionally safe and tax-favored investment. And they’re even more attractive when they’re insured—that is, when scheduled interest and principal payments are guaranteed by Triple-A rated municipal bond insurers.

Municipal bond insurance protects investors primarily in two ways. Occasionally, cities or states that issue debt securities get into financial difficulty. When that happens, they may not be able to pay interest and principal on their debt as scheduled. Even if an issuer does not default, the rating agencies may lower the ratings on an issuer’s securities if its financial condition deteriorates, causing the market value of its securities to decline.

Investors in bonds insured by Triple-A rated municipal bond insurers are insulated from these risks because they can depend on the insurer, whose claims-paying ability is rated Triple-A, to make timely payment of scheduled principal and interest.

The strong demand for insured issues (almost half of all new issues are insured) is due to investors’ desire for secure investments. In addition, when an issuer faces financial difficulties, history has shown that its insured bonds have more liquidity and price protection than its uninsured bonds. Issuers often prefer to offer their bonds with the highest ratings in order to lower borrowing costs…..

Higher rates [or even wider credit spreads] in an already slowing economy would be, shall we say, toxic. What’s worse, and no doubt of utmost concern to the Federal Reserve, Regulators and industry insiders – the sub-prime contagion seems to be spreading.

With the Mortgaged-backed / asset backed paper markets all but shuttered – the last thing in the world that the Fed would like to see is the Muni bond market falter. One might be led to think that someone with a sterling reputation like the Oracle of Omaha proactively lending his name and a vote of confidence to a beaten down sector would be reason enough to restore any wavering confidence, eh? Buffett is no stranger to politicos or names that have historically been synonymous with Central Banking.

Buffett pictured with Arnold and Lord Rothschild visiting
Rothschild ancestral home in England circa 2002

Come to think of it, once you are talking about the integrity of Muni bonds – you really are only one step away from the holy grail of debt instruments – Treasuries – aren’t you?

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Thanks for putting that out there, There was no mention of the MGIC problem here! 

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Shaggy Rogers

Banks, New York Regulator Meet on Bond Insurer Rescue (Update1)

By Erik Holm

Jan. 23 (Bloomberg) -- New York State's insurance regulators met today with U.S. banks to discuss raising new capital for bond insurers, said a department spokesman.

Talks in New York with the unnamed banks are part of Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the market's financial condition, said agency spokesman Andrew Mais in an interview.

New capital may help preserve the top credit ratings for the bond guarantors such as MBIA Inc., the industry's largest, and halt any erosion of investor confidence in the $2 trillion of assets they guarantee. Ambac Financial Group Inc., MBIA's biggest rival, lost its AAA grade from Fitch Ratings this month on concern about rising defaults tied to subprime mortgages.

MBIA rose $4.27, or 34 percent, to $16.80 in 3:31 p.m. New York Stock Exchange composite trading, while Ambac added $4.55, or 57 percent to $12.52. MBIA and Ambac shares have declined more than 80 percent in the past year before today.

Moody's Investors Service and Standard & Poor's are reviewing Ambac and MBIA, both based in New York, for possible downgrades. Insured municipal bonds usually carry the debt rating of the insurer rather than the underlying debt.

Downgrades may force sales by investors who are required to hold only the highest-rated bonds and cut profit for banks that have already posted more than $130 billion of writedowns and credit losses tied to the falling value of mortgage securities.

Mortgage Values

Ambac and MBIA have suffered losses because of guarantees they sold for structured investments such as collateralized debt obligations backed by mortgages. The industry collectively guaranteed $127 billion of CDOs linked to mortgages that were given to borrowers with poor credit.

The securities have plunged in value as defaults by borrowers soared to a record in the third quarter of last year, according to the Mortgage Bankers Association.

To contact the reporter on this story: Erik Holm in New York at .

Last Updated: January 23, 2008 15:37 EST


Sheesh!!!! Why can't journalist bozos tell it like it is instead of aping Wall Street's lying sack of $hit script?  Even if ALL subprime borrowers defaulted, it would not have created THIS MESS.  Securites plunged in value due to margin calls on over leveraged betting forcing sell offs establishing market value instead of fantasyland mark to model values on CDO's that were over valued and over rated to begin with.  Derivatives were devised to spread risk, not to be used as a speculative tool.  Besides, where's the speculation if traders knew all along that servicers were manufacturing defaults?  And now they want to bail out the bond insurers who fed their greed?  Gimme a break!

I am so sick of hearing about borrowers with poor credit and defaults by borrowers causing plunges in value.  Hey morons, it's NOT about the mortgages.  Why can't they just learn to use the F word? 


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Bond :)
Bond insurance crisis looms on Wall Street
Globe and Mail - 12 hours ago
Beginning around 2000, however, many of these firms migrated into more complex products, and began insuring securities such as collateralized debt obligations (CDOs), which pool various forms of debt, including subprime mortgages.
State probes bond insurer
Baltimore Sun - Dec 28, 2007
The agency has started a detailed financial examination of ACA and put a team of examiners in New York to determine the extent of the company's exposure to defaults in the subprime mortgage market. The financial cloud over ACA, once part of Baltimore's ...

RTT News
Sector Snap: Mortgage Insurers
Houston Chronicle - 4 hours ago
2008 AP NEW YORK - Shares of mortgage insurers plummeted Wednesday after the biggest mortgage insurer said it expects claims to swell this year.
Banks fire up financial sector MarketWatch
MGIC shares plunge after it says claims could reach $2B in 2008 The Canadian Press - (subscription) - RTT News - Reuters
all 63 news articles »
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Shaggy Rogers

Investment Outlook By Bill Gross, January 2008

Bill Gross, head of PIMCO, the world's biggest bond fund, calls it the "shadow banking system." He's referring to the way money and credit fly around the globe, courtesy of the very same "sophisticated" and "free" institutions that created such prosperity for so many people in the financial industry.

Banks recognize that not all their loans will be repaid. They operate on margins of safety, with reserves set aside for when things go wrong. But in the worlds of swaps, hedge funds and derivatives…slick operators can invest billions with no margins of safety…and no reserves. The result, Gross says, could be catastrophic:

"But today's banking system, as pointed out in recent Investment Outlooks , has morphed into something entirely different and inherently more risky. Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved but credit default swaps (CDS) are perhaps the most egregious offenders. While margin does flow periodically to balance both party's accounts, the conduits that hold CDS contracts are in effect non-regulated banks, much like their hedge fund brethren, with no requirements to hold reserves against a significant 'black swan' run that might break them.

"According to the Bank for International Settlements (BIS), CDS totaling $43 trillion were outstanding at year end 2007, more than half the size of the entire asset base of the global banking system. Total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks."
Talk about WMD's !  Small wonder bond insurers went broke feeding the greed. 

"It's only when the tide goes out that you learn who's been swimming naked."

Warren Buffett speaking specifically on insurance and derivative business.

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