Category: Insurance

Economics Update

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Federal Reserve Vice Chairman Donald Kohn is now giving some pretty strong signals that there will be no further rate cuts, which indicates that the Fed might be a bit concerned about inflation now.

The currency markets are most definitely concerned about inflation (which is another word for currency devaluation), and so the dollar has dropped. It’s near a month low.

Oil just smashed the $130 barrier, settling at $133.17/bbl, and retail gasoline hit another record.

Real estate continues to face downward pressures, with Mortgage applications falling 7.8%last week. So even though we are in buying season, people are not looking to buy.

Finally, we have what appears to be the collapse of a monoliner insurer with CIFG Guaranty having its rating cut to junk status. They were downgraded from AAA in March, and Moodys just downgraded them further from A1 to Ba2, 7 levels at one swoop.

The business for monoliners is dependent on having an AAA rating. Put a fork in them, they are done.

Signs of Progress in Iraq and Afghanistan, They Are Entering the Modern Financial System

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Specifically insurance fraud, but it’s only the contractors, who have conspired with insurance companies to stick it to the tax payers.

It’s basically kickbacks. The contractors negotiate their own insurance deals, which are over priced, and they get commissions from the insurers:

KBR Inc., one of the largest defense contractors in Iraq, paid the insurance giant AIG $284 million for medical and disability coverage under the Defense Base Act, a reference to the federal law mandating the insurance. Due to the way KBR’s contract is structured, this premium, along with an $8 million markup for KBR, gets billed to the taxpayer.

“Out of this amount, just $73 million actually goes to injured contractors, and AIG and KBR pocket over $100 million as profit,” Waxman said.

Lovely.

Economics Update

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The CPI rose less than expected 0.2%, though there was a huge delta in food, about 0.9%, 2.5% and 11% annually rates.

Look at my earlier posts on this issue, and you’ll see that the real inflation is far closer to 11% than it is 2.5%.

This has, for reasons unclear to me, led to the UD dollar strengthening in overseas markets.

Year over year foreclosures in the US are up 65%, and between the banks discounting these properties, and the builders discounting new homes, we have a way to go to bottom.

In investing, the dispute between Clear Channel, which had a deal to sell itself to a private equity firm, and the banks, who were trying to get out because they had no expectation of being able to resell the debt, has been settled. The buyout is now at 36$/share, as opposed to the earlier $39.20/share, so both sides took a haircut to get the deal done.

Still this indicates that the credit markets are still frozen.

Finally, we are back to the monoliner insurers. with MBIA and Ambac’s losses making the ratings agencies nevous.

If the ratings process was an honest one, they would have lost their AAA status over 6 months ago.

Economics Update

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We have another sign of recession, imports falling sharply in March, which indicates a decrease in consumer demand.

It also appears that the decisions by the Bank of England and ECB to target inflation may be putting an end to the brief dollar rally.

In energy, we have Oil settings new record, $126.20/bbl, and gas hitting a new record, $3.671/gal.

It should be noted that much of our trade deficit is oil, but the number dropped even with increasing oil prices. Things are slowing down a lot.

I would note that there are signs that the credit crunch is no spreading to insurance, with AIG posting a 1st quarter loss of $7.8 billion, and making plans to issue more stock to raise needed capital.

If the insurance industry goes balls up in any significant way, it’s going to be effecting a lot more people.

Finally, we have housing inventories continuing to rise, 3.5% in April, and 6% year over year.

Economics Update

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The dollar is doing better now, $1.5613:€1.0000, as I type this, which is about 3% stronger than when it was above $1.60.

I put down most of the movement over the past week to people betting on what the Fed will do in interest rates, and the consensus that it will not cut.

Oil, however, just went up again, as did gasoline, because of reports of a pipeline attack in Nigeria. The reality is that supplies are so tight that even a minor disruption causes a minor panic.

The New York Times has discovered that the housing crisis has moved to tony Greenwich, CT. And so they cover it with wringing hands, because it interests their readers.

For the rest of us, the fact that the mosts states are having financial meltdowns, and many are near broke, because of falling tax revenues, are a matter of greater concern.

Also, Consumer confidence is at a 26 year low. That’s as in 1982, when we were at 10% unemployment, and so consumers are scaling way back on spending.

In a sign of the apocalypse, Moody’s is downgrading some more of the Alt-A mortgage backed slop. Who knew that a ratings firm would actually do its job.

It’s been a busy day for AMBAC, the monoline insurer, with a report that it may need to seek more capital after posting a $1.66 billion dollar loss for the quarter. Further confirming this report is the fact that their interim CEO is saying that there are no liquidity issues and that its ratings are solid.

S&P is back stopping Ambac on this explicitly stating that the loss will not lead to a downgrade.

Of course if the ratings agencies, or for that matter the financial markets, were at all honest, most the monoliners would already be rated as junk.

Insurer Problems on a Much Smaller, and Much Larger Scale

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This is about health insurance, and obviously these policies, whose payouts typically max out at less than a million dollars, are smaller than the monoliner’s policies, but this is the tip of the iceberg.

UnitedHealth Group is taking a major hit because fewer and fewer employers can afford to buy its product.

The healthcare crisis is real and ongoing, and we are going 90mph towards a brick wall.

Economics Update

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Busy day in real estate, we have:

Of course with any of these situations, you will inevitably find the highly placed moron, and today’s is Morgan Stanley CEO John Mack, who is saying that he thinks that the credit crunch is, “in the final innings”. If you have money in Morgan, get it out now.

Why am I so certain about this? Because the Fed auctioned another $50 billion banks in their “crap for cash” program, which has now “auctioned” $310 billion to banks for their worthless mortgage paper.

If that doesn’t convince you, how about GMAC looking down the barrel of a ratings cut, which means that people who might want to buy a car will find it even more difficult to get a loan to do so.

Of course, Mack thinks that things are looking up because private equity firm TPG just put $7 billion into WaMu, which implies to him that private equity is on its way to a comeback.

Nope….Dead cat bounce. WaMu’s only virtue is that it’s better, and only a bit better, than Countrywide.

For an idea of how badly things are going, note that First Marblehead is at risk of imploding. Note that FM is a student-loan services provider. It should basically be impossible for them to lose money.

This is federally guaranteed, and cannot be discharged through bankruptcy, but given that their insurer, The Education Resources Institute Inc., just filed for bankruptcy, all bets are off.

Economics Update

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In the world of pipe dreams, we have the EU calling for a coordinated response to the credit squeeze.

The Euro-Wimps just don’t get it. This is America. We don’t do joint action based on a deliberate approach to everyone’s long term best interest. We shoot first, and ask questions later, and when the dead guy we shot doesn’t answer, we water board him, and then we bail out the bad actors, like Bear Stearns.

In the ever entertaining world of the monoliners, Fitch has cut MBIA’s rating to AA from AAA, because they are under capitalized (broke).

The disgrace here is that it took so long, though you knew that it was coming when MBIA asked Fitch to stop rating it about 3 weeks ago.

In the no surprise category, bankruptcies jumped 30% over in march 2007 year over year.

And for those of you who think that commercial real estate will be uneffected by the crash, vacancies at malls have skyrocketed.

Economics Update

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First, we have a new peak in Jobless claims, 407,000, the highest level since Katrina hit New Orleans (here and here). Note, as always, that weekly jobless numbers are just a snap shot of a single week, and as such, there is a lot of noise, but this did not stop the dollar from retreating in response.

That being said, the fact that the IMF is predicting a global slowdown ain’t a good sign either.

Given that we have a consumer driven economy, the fact that people are falling behind on their debts at the highest rate in 15 years is a good indicator that we are already in a recession.

In energy, was down a buck, and gasoline hit a new record. Assuming that we are not at peak oil, there might be some moderation as the economy cools.

The markets are seeing a cooling economy too, driving Treasuries higher, because investors are looking for safe havens.

In real estate house prices fell in 21 metro areas, and foreclosures rose to record levels. Same old same old.

Finally, I’m beginning to feel like Keith Olbermann and Bill O’Reilly. I can’t make through a week without some insurer disaster intruding. In this case, it’s Triad Guaranty Inc., which is considering, “a plan to stop writing new business”, called a “run-off” in the insurance. Note that it’s business is mortgage insurance, as opposed to monoliner bond insurance.

Too many people defaulting on mortgages.

Economics Update

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In honor of March Madness:

Click image for source

You may recall that Monoliner insurer FGIC having problems. Now it is saying that was saying that it would not honor its insurance contract withCredit Agricole SA and IKB Deutsche Industriebank, because they deceived the insurers about their financial health.

Seeing as how IKB seems to be facing villagers with torches, this may very well be true.

It’s in court.

And of course, because it’s a day of the week ending with “y”, the Federal Reserve is giving away another $100 billion to the banks.

No wonder noted bear, and Oppenheimer analyst Meredith Whitney is predicting that Citi will be cutting its dividend again soon.

In economic matters for the rest of us, personal income did better than expected, but personal spending remained weak, and the head of Freddie Mac is saying that he does not expect recovery in house prices until 2010.

I say that he is an optimist. The regional crashes we have seen, which have been much less severe, have all lasted at least 5 years, which puts the date at 2012, though I would take 2015 in the over/under in non-inflation adjusted dollar terms.

I don’t think that we will be back to the 2006 highs adjusted for inflation in my lifetime.

And in the world of collapsing economic institutions, we have former sub-prime lender Fremont General ordered to find a buyer by the FDIC, in addition to restricting interest it can pay to depositors, payments to senior executives, and transfers to its parent company.

This does make the fact that the Office of Federal Housing Enterprise Oversight has told Fannie Mae and Freddie Mac that they are free to raise another $20 billion a bit nonsensical.

The taxpayers will end up on the hook for all of this.

Economics Update

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The first two bits are easy to understand, New home sales are the lowest since 1995, which matches with the horrid existing home sales data that I posted yeaterday, and Factory orders fell off a cliff in February.

First, things are simply getting even weirder in the never-dull world of monoliner insurers, with the Federal Home Loan Banking looking at offering bond insurance for municipal infrastructure project bonds.

It’s a dull, but very profitable racket, because there has been some sort of freaky deal between the monoliners and the rating agencies for years that has them offering artificially low ratings to muni bonds, which pretty much forces said governmental agencies to buy bond insurance.

If it works, it kills the monoliners, because this business is the only thing keeping them afloat on a sea of collateralized debt obligations (CDO).

Additionally, we have monoliner insurer FGIC notifying regulators that due to some “dodgy” dept that it is ensuring, that it is insolvent under New York State law, “FGIC in notes to its consolidated financial statements said it plans to submit a plan to the New York superintendent to reduce its risk. FGIC also said it has voluntarily ceased writing new business to preserve capital.”

This means that, theoretically at least, regulators could seize the FGIC, though they are in litigation with the borrower of the aforementioned debt, and they are filing a recovery plan.

Economics Update

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First, news of the stupid, Office of Federal Housing Enterprise Oversight has reduced the reserve capital requirements for the GSEs, so Fannie Mae and Freddie Mac will be able to loan another 200 billion out.

The problem is blow back from too much leverage, so you are allowing more leverage?

There are people walking away from their homes now because they realize that it will be 10+ years before they have any equity at all in their homes, and you want more exposure to the 2nd and 3rd largest borrowers in the world?

BTW one of the interesting points about yesterday’s rate cuts was that the dollar strengthened, which really runs counter to the normal motion. The analysts say that this was because it indicated that the Fed was really going to keep the economy out of recession.

Well, that lasted about 24 hours (here and here)

Of course no bit of economic news is complete without the performance art/low humor known as a press release from one of the monoliner insurers, in this case
Ambac claiming that it had “no material exposure” to the Bear Stearns debacle.

Yeah, sure. I may not be an economist, but I know weasel words when I hear them.

BTW, one of the CEOs of the big 3 auto makers are expecting sales to be poor this year. Such insight. That must be why they get paid 7 figures a year plus bonus.

Mortgage application volume fell 2.9% last week. No one is lending, and no one is buying.

Finally, we have Goldman Sachs and Lehman Brothers conducting a fire sale on some of their dicier oinvestments fire sale on debt associated with leveraged buy-outs and private equity deals.

This is considered a good thing, which locally, it is. If you pump radioactive waste out of your basement, into the town reservoir, you are doing better personally.

Economics Update

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In terms of market stability, Carlyle Capital share prices have tripled after Carlyle Group co-founder David Rubinstein said that it was looking at ways to compensate investors.

I’m not sure how much it means. The collapse of Carlyle Capital, that was so yesterday….hold it….it actually WAS yesterday.

Today, it’s Bear Stearns, which gets its own thread for reasons of personal ego.

Inflation in February was 0%, largely due to some moderation in food and energy, which won’t happen in March, given that oil is still at around $110/bbl, and the dollar is still tanking.

In insurance, it appears that losses are approaching the levels of Katrina, though we are probably less than 1/3 of the way through this.

Economics Update

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Well, gasoline prices hit all-time high today, and oil prices hit another record too.

Interesting thing though, at the start of the day, prices were down on increased inventories.

Oil Prices are rising because the dollar is falling now.

In the ever entertaining world of monoliner insurance, MBIA and Fitch Ratings are in a pissing contest. MBIA dropped them as a ratings service, because Fitch thinks that they should be downgraded.

MBIA and AMBAC’s debt is junk in reality, no matter what S&P, Moody’s, or Fitch says.

Speaking of Moody’s, they are forecasting a big drop in earnings, down from $2.17-$2.25/share to $1.90-$2.00, which tanked their stocked.

The GSE’s stock tanked too, with Fannie Mae falling 6% and Freddie Mac falling 3%. It turns out that the relaxed lending limits has the market spooked that this will lead them into more losses, which, of course, it will.

If I had to make a bet between Fannie and Freddie, I’d go with Freddie though. their CEO has a good grasp on reality, he thinks that the housing market is only 1/3 of the way to the bottom.

I’m a bit more of a bear than he is, but I think that Richard Syron is a member of the reality based community.

Despite the rate cuts, and the talk out of the Fed about more rate cuts, mortgage rates are up, and applications are down as a result.

In the more general doom and gloom scenarios, I present the following:

Citigroup is having to pump $1 billion into six of its internal hedge funds. I guess that they have to sell another piece of themselves to some Arab sovereign wealth fund.

Finally, we have ING New Zealand suspending withdrawals from two of their CDOs.

New Zealand???? New F#$@ing Zealand? Whisken Tango Foxtrot.

The meltdown is now fully global.

Local and State Governments Call for Changes in Bond Rating System

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One of the peculiarities of bond rating is that state and local bonds are typically rated much lower for a given level of risk than those of private entities, which requires that they purchase bond insurance.

This is the still lucrative core of the now almost insolvent monoline insurers business.

A number of public officials have expressed their concerns to the rating agencies:

On March 4, Bill Lockyer, the treasurer of California, sent a five-page letter to Moody’s Investors Service, Standard & Poor’s Corp. and Fitch Ratings asking for justice.

`”State and local governments almost never default on the bonds they issue,” the letter says. “The safety of municipal bonds is grounded in a fundamental fact: a city or state simply is not going to go out of business during the life of its bond issue.”

The letter was signed by 14 other state and local officials, including Michael Murphy of Washington, Michael Fitzgerald of Iowa and Patrick Born, the chief financial officer of Minneapolis. I mention these three in particular because they are public finance veterans who really understand the business.

Maybe every one shouldn’t be rated AAA, the letter asserts. Just most of them.

They are absolutely right.

As the system stands now, most state and local governments have to buy insurance in order to get an AAA rating, but the risk of default is minuscule compared to commercial AAA bonds.

Smaller Bond Insurers Cleaining Up on Muni Business

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With a MBIA and Ambac in death spirals over their involvement in mortgage backed securities and other similar instruments, former bit players like Financial Security Assurance and Assured Guaranty Ltd, which never drank that Koolaid, have seen their market position in the municipal bond insurance market soar.

The consequences I’ve predicted with the ability of municipalities to raise money may be milder than I had anticipated.

Economics Update

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Well, we don’t need to feel so alone any more, U.K. house prices Fell 0.3% in February. What the French call “Anglo-Saxon” capitalism seems to be working wonderfully.

Back in the US, the housing market is not looking up, with Foreclosures hitting an all time high:

Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report’s quarterly, 36-year history.

Even if you are paying your mortgage, you are probably still losing home equity. Total home equity is below 50% for the first time ever. It was 49.7% in Q2 2007, and 47.9% in Q3 2007, and the total equity dropped from $9.65 trillion from $9.93 trillion, or about $1000 for every man woman and child in the united states.

There is not a whole bunch of confidence in real estate now, so the spread on mortgage backed bonds is at its highest level in 22 years, and S&P has downgraded WaMu to BBB from BBB+.

We don’t have a stampede out of mortgages and real estate yet, but there are now rumors that UBS dumped $24 billion in Alt-A residential mortgage backed securities (RMBS). If this is reality, we could very see a stampede for the door, and Alt-A, which is for people with credit ratings above 700, will go the way of subprime.

So it’s no wonder that Fannie has dropped to a 12 year low.

It looks like the world is noticing this because the Dollar hit another record low, and oil hit another high.

This may have been driven by the European Central Bank and Bank of England not lowering rates, when it is expected that the Fed will.

We do have some mildly positive news retail sales were good in February, and new unemployment claims have fallen, though continuing claims are still going up.

It seems that Ambac is going to be a laugh a minute, see here, here,
and here. Basically, they have a plan to raise much needed capital, but no one thinks that it will work, and the markets halted trading at one point due to volatility over rumors.

Finally, in a case of the weak helping the even weaker, GM will provide $3 billion in loans to Delphi in an attempt to help them emerge from bankruptcy.

If that ain’t good money after bad, I don’t know what is.