Category: Insurance

Economics Update

No Comments

A number of economists have suggested that the world economy has become “decoupled”, and that a recession in the US may not cause a recession elsewhere.

If the latest information coming out of Japan is any indication, these economists are wrong, as Japan seems to be heading into a recession too, though one could argue that the 1990s Japanese recession still hasn’t fully ended.

Not surprisingly, this driven the dollar up, and it hits a 7-month high vs the Yen, ¥109.56.

In the ongoing GSE soap opera, the Treasury Department has hired Morgan Stanley to look at at the financial structure of Fannie Mae and Freddie Mac.

There was a competitive bid process to select Morgan, though I still wonder if this is prudent oversight, or the fox guarding the hen house.

In either case, I think the fact that Freddie Mac has cut dividends after posting an $821 million loss, about 3 times what was expected, was a sensible move.

Dividends are for when you make a profit.

The monoliner insurers are not a soap opera though, they are farce, and the latest case is Ambac claiming a $823.1 million profit, which appears to be entirely due to an accounting change:

Ambac, once the second-largest bond insurer, reported a $1.7 billion net loss in the first quarter after a $3.3 billion loss in the fourth quarter of 2007. A rise in the risk premiums on Ambac’s own debt in the second quarter lowered the value of bond guarantees, which was allowed to be reflected as a gain under new accounting rules, resulting in the quarterly profit.

Ambac rose 35 cents, or 7.4 percent, to $5.08 at 10:08 a.m. in New York Stock Exchange composite trading.

Ambac and other financial companies are taking advantage of the accounting standard change — intended by rulemakers to expand so-called mark-to-market accounting — to report gains when market prices for their liabilities fall.

I’d appreciate a translation from accountant-speak, but it appears to me that they are profiting from the fact that no one is willing to pay face value on the debts that they owe.

In real estate, nirtgage applications rose last week, though only a little, and the week to week numbers are, as I always remind my reader(s) noisy. It’s still way down.

In energy, oil fell on reports of increased inventories to $118.58/bbl, and
retail gasoline fell again. It’s now $0.25 off of the record, so you save two bits a gallon.

Finally, we note that when the US gets a cold, Mexico catches pneumonia, particularly in rural villages, where the economy is even more dependent on remittances.

The depressing thing is that on a per capita basis, Mexico is solidly in the middle of the world in terms of wealth, and if a bit more could be pried from the top 1-2%, everyone would do better…..But I forget…that’s socialism, so we deal with hoards of economic refugees in the US instead.

Economics Update

No Comments

Well, the official unemployment rate climbed to a 4 year high, 5.5%, and total number of jobs fell by 51K, the 7th straight monthly drop in a row, in July.

We’re in a recession. Get over it.

Manufacturing actually did a bit better than expected in July, it was flat, though much of that was military and exports driven by a weak dollar, but I’ll take what I can get.

In the monoliner insurance follies, we have good news for AMBAC, they paid Citigroup $850 million to get out of a $1.4 billion guarantee on some collateralized debt obligations (CDO).

It’s being reported as good news for AMBAC, which says something about the qualities of said CDOs.

As bad as the job news was, it was better than expected, so the dollar strengthened in international trading.

In energy, the employment report drove oil up too, though retail gasoline is back below $3.90/gallon. Woo hoo!!

Trent Lott May Be Involved in Witness Tampering

No Comments

It’s tied into the Ricky Scruggs case, and a deposition where Zack Scruggs, Lott’s nephew, took the 5th in response to the question, “Has it been your custom and habit in prosecuting litigation to have Senator Lott contact and encourage witnesses to give false information?”.

It’s nice that Scruggs and Lott got along so well…I would have figured some tension, as Scruggs was a big Democratic Party supporter in Mississippi.

FDIC Puts Brakes on overed Bonds

No Comments

As I wrote earlier, Treasury Secretary Hank Paulson is pushing a new (for the US, at least) sort of bond, the covered bond, to unfreeze the mortgage credit markets.

Well, it looks like the FDIC just put up a road block, saying that it is considering limiting these new bonds to 4% of bank liabilities.

It has expressed concern about the instruments might place additional risk on them:

“The FDIC is concerned that unrestricted growth, while the FDIC is evaluating the potential benefits and risks of covered bonds, could excessively increase the proportion of secured liabilities to unsecured liabilities,” the agency said. In other words, Back off my insurance fund. The agency did say it would consider revising its guidance after it has a chance to evaluate the effect of covered bonds on banks.

The FDIC could refuse to cover these bonds in the event of a bank failure, and as such, if they institute this policy, it may very well put a stake through the proposal’s heart.

Of course, these days, all real estate loans are risky instruments.

Read Nouriel Roubini

No Comments

Specifically, where he relates what he said on a Bloomberg TV Interview, where he says that he expects the worst financial crisis cince the Great Depression and worst U.S. recession in decades.

No surprise to me, or his other regular readers, but if you don’t read RGE Monitor regularly, it’s a must read.

I think he’s right, though he may be too optimistic.

He predicted the housing/credit/insurance bubble collapse, but was actually more optimistic that reality.

Bush Vetoes Fair Doctor Pay to Protect HMO Executives

No Comments

Bush objects to the fact that subsidies for private insurers to participate in Medicare, more accurately a license to skim and further bankrupt the fund, have been reduced to avoid a doctor pay cut, and so he has vetoed the bill.

Well, it looks like its time for an override vote, and the text for the attack ad writes itself, so I would say that it’s better than 50/50 that the veto will be overridden.

If it isn’t, watch as doctors, facing already low fees being cut by 10.6%, reduce services, and patients scream….at Republicans.

Economics Update

No Comments

I missed this when it was announced late Friday afternoon, but two moremonoliners hit junk status, FGIC and XL Capital and XL Financial.

I wonder when all of the monoliners will be junk rated, and I also wonder why this is not true now.

This means more than just that these insurers can no longer realistically write policies. These downgrades come with significant penalties, as MBIA’s statement that’s it downgrade will force it to make $4.7 billion in payments to creditors.

When they got downgraded, the terms of their loans changed.

In energy we have oil up despite the Saudi meeting, and retail gas prices falling. Hopefully this will bring a few months of stability at the pump.

The dollar strengthened, largely on crappy growth in the Euro zone, which would suggest that the ECB will hold off rate hikes for a while.

In real estate, we have Lehman predicting more losses for Fannie Mae and Freddie Mac, which should come as no surprise at all.

After when ¼ of Bay Area home sales in May had been in foreclosure, and statewide home sales hit a 13-year low, it’s not like there will be a whole bunch of players making money.

It’s why George W. Bush’s ownership is becoming a Pwnership society, with home ownership falling to below where it was when he announced the initiative to get people to buy houses.

BTW, if you think that this won’t effect you, you are wrong. We now have an estimate of properties falling by $1.46 Trillion, which, by my quick envelope calculation, means that state and local governments are looking at revenue shortfalls on property taxes on the order of $1.5 billion/month.

Economics Update

No Comments

I’m lazy, so let’s just say, Oil up, retail gasoline up, and dollar down.

I’m beginning if I should stop covering the above swings daily….day-to-day has too much noise to signal.

On the other hand, the rumors of massive writedowns at Citi over mortgages, LBO loans, CDOs, etc. is probably more significant, as is the fact that Moody’s finally cut MBIA’s credit rating.

Moody’s Investors Service on Thursday stripped the insurance arms of Ambac Financial Group and MBIA of their AAA ratings, citing their impaired ability to raise capital and write new business.

….

Moody’s cut Ambac Assurance three notches to “Aa3,” the fourth highest investment grade, and downgraded Ambac Financial three notches to “A3,” the seventh highest investment grade, from “Aa3.”

MBIA Insurance was cut five notches to “A2,” the sixth highest investment grade, and MBIA Inc was cut five notches to “Baa1,” three steps above junk, from “Aa2.”

This is actually more significant than just making their borrowing money more expensive, it means that some of the holders of insurance contracts the right to terminate or require the additional collateral from the company.

It’s what Atrios calls, “Another Jenga Piece” coming out.

Monoliner MBIA Playing Chicken With Regulators

No Comments

Yves Smith notes that monoliner bond insurer MBIA, after raising over a billion dollars through an equity offering, is refusing to transfer the proceeds from its holding company to its insurance subsidiary.

It appears that they are doing this because senior executives are paid by the holding company, and not the insurers.

One wonders then, why regulators, in this case Eric Dinallo, the New York State insurance commissioner, aren’t doing something about this, and the answer is blackmail:

The risks associated with the vast, unregulated market for credit default swaps played a crucial role in the bailout of Bear Stearns. Now these financial instruments are taking center stage in another Wall Street drama: whether regulators will let MBIA, the big bond insurance company, renege on a promise to shore up a crucial unit with $900 million in capital.

MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health. Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.

But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.

As the old saying goes, “If you owe the bank $1000, the bank owns you. But if you owe the bank $1,000,000, you own the bank.”

I’m thinking that perhaps a better solution for New York State regulators might be to find a way to arrest senior management at MBIA, as it appears that their capital raising was clearly fraudulent.

Economics Update

No Comments

Weekly unemployment claims fell 5000 to 381,000 from the week before, though predictions had been for 375,000. It’s noisy, but the number is still too damn high, even if the leading indicators are up for the 3rd straight month (though not by much).

I would be more concerned that the Philadelphia Business Outlook Survey by the Federal Reserve went down when the experts predicted an improvement. (As Philly goes, so goes the nation’s economy, at least that’s how the Fed sees it).

Energy news was generally good though. Oil dropped because the Chinese are going to stop subsidising retail gasoline and diesel purchases, which should reduce demand considerably, and retail gasoline prices fell for the 3rd day in a row to $4.073 a gallon.

For some reason, the dollar fell too, though conventional wisdom would say that it should have risen.

On a day to day basis, there is more noise than data, you get a better picture on (at least) a weekly look.

In any case, I would not be hoping for a quick real estate turn around. Mortgage rates just hit a 9 month high, and all indications are that it will go higher, particularly since Triad Guaranty’s mortgage insurance subsidiary is shutting down, which is the first time that I’ve heard about a mortgage insurer shutting down.

If this becomes more common, it will force mortgage rates up, and home sales and prices further down.

But it wouldn’t be fair for me to talk about insurers without talking about the monoline insurers, who are insolvent, but still have AAA ratings from the agencies…at least from some of the agencies.

Ambac Financial, the second largest of the monoline insurers, is terminating its contract with Fitch Ratings, because Fitch dropped their ratings.

They are the 4th monoliner to drop a ratings agency because they don’t like the truth, and it screams out for meaningful regulation.

Moody’s to Rate Muni Bonds Fairly

No Comments

The original business for monoliner insurers was to insure government bonds, which were rarely rated at AAA by the agencies, even though they were at least as safe as AAA corporate bonds, so they would buy insurance, because the interest rate savings would more than pay for the insurance.

I’ve always seen this as self dealing by Wall Street. The ratings agencies set about screwing the taxpayers for the benefit of other folks, whether they be the monoliners or the investors who would get more interest.

Because of the increases scrutiny of ratings agency, there has been pressure to change this, and now Moody’s has announced that it will adopt the same ratings for Munis as it uses for corporate bonds.

About bloody time.

MBIA Execs Looting Company

No Comments

Or at least that’s what appears to be going on.

MBIA has raised a lot of capital lately, and it’s considering not putting the capital it just raised into its monoline insurance division, but it raised the capital for its insurance division.

As Yves Smith puts it:

So why is MBIA hoarding cash at the parent level? Well, executives (along with other corporate charges) are paid out of the parent company’s books. The subsidiaries can dividend cash up only if the are profitable OR get permission from their regulator.

Earth to SEC, we have a problem.

Economics Update

No Comments

After 5 straight months of non-farm payroll job cuts, we are finally seeing an increase in the unemployment rate, ½% to 5.5%. It’s the biggest rise in 22 years, and it appears that the we’ve run out of discouraged workers, who are not counted as unemployed, to keep the rates low.

Oil, which had been trending down since May 22, reversed itself and hit a new record, peaking at $138.36/bbl. Retail gasoline, however, finally fell a bit (scroll down), down to $3.986 yesterday’s record of $3.989.

That’s the first time that gasoline prices have fallen in nearly a month.

Not surprisingly, all this has pummeled the dollar which has weakened to $1.5751 from $1.5592 yesterday to the Euro.

BTW, it’s not just monoliner insurers that are hurting, Fitch has downgraded mortgage insurers MGIC and PMI ratings, two of the larger mortgage insurers to to BBB+ from A.

If they go under, millions of people will technically be in default on their mortgage until they find another insurer.

Given all this, it’s no surprise that Federal Deposit Insurance Corp Chairman Sheila Bair is saying that we may see some failures of larger banks.

Economics Update

No Comments

Weekly initial unemployment claims were less than expected, though the 4 week moving average of people receiving unemployment benefits was up.

If there is a “wealth effect”, then this might be the side effect of the not wealth effect, as household net worth dropped by $1.7 trillion in 2Q of 2008.

A lot of this drop is due to the real estate market, where there were over a million homes in foreclosure in Q1 of 2008, 2.5% (one in 40 for the mathematically challenged) of all loans being serviced by the Mortgage Bankers Association, which explains why Federal Reserve Vice Chairman Donald Kohn expects to see more write-downs and losses for banks.

Another day, another record for retail gasoline, $3.989/gal, and oil rose to $125.05/bbl, largely on the European Central Bank holding its interest rate at 4%, and it’s president publicly worrying about inflation, which implies rate hikes and a weaker dollar, which tends to push oil prices up.

Finally, monoline insurers MBIA and Ambac are delaying attempts to try and raise capital because of the prospect of a rate cut by Moody’s.

Economics Update

No Comments

ADP’s private report suggests 40,000 new jobs, though it should be noted that , “U.S. companies’ planned layoffs rose 15 percent in May from April to the highest monthly total since December 2005” it has been noted that, “ADP has been inaccurate of late, overpredicting payrolls,” so I would wait for the government figures.

On the other hand, productivity rose more than predicted in Q1 of 2008, though all indications is that this was not more stuff to do, but simply less stuff doing it, “Aggressive cuts in worker hours will help shield corporate profits and keep wage-related cost pressures under control, helping to reassure the Fed.”

Personally, I’m inclined to take the pessimistic assessment of this, because the Institute for Supply Management’s (ISM) non-manufacturing index fell to 51.7, indicating a softness in the service sector.

Additionally, we have the forecasting a world wide growth rate of only 1.8% this year, and weekly mortgage applications fell to a 6-year low.

Inflation worries are now weighing down the dollar, though oil prices are down a bit more to $122.48/bbl, but retail gas prices rose to a new high again, $3.983/gal.

Lastly, we have a visit from our old friends, the monoline insurers, with Ambac and MBIA getting hammered because Moody’s is finally considering a downgrade on their debt.