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Let's Get Our Heads Out of the Sand

By Rita and Ferris Browner

Services for Real Estate Pros with Rent-to-Own, Real Estate Coach, Credit Restoration

August 13, 2008 07:14 AM

A dear friend, Lloyd Wynn, wrote an article for the Black Commentator that I'd like to share with the community.

My comment is this kind of information is not always shared "front and center" in media coverage. How will the financial market navigate going forward?

The stone, hard, cold reality is this economy is about go into a tailspin, unlike anything you have witnessed. The recessions of 1980-82, 1990-91 and 2001 were minor in comparison with the imminent decline of this economy. This one will be characterized by massive job lost. The good news is the downward spiral we are in will not be as catastrophic as the Great Depression (1929-1941).

Let us start near the top. The bond insurers are on the ropes. There are primarily three types of bonds (Federal, Municipal-state, local and quasi-governmental agencies - and corporate). Essentially a bond is a loan made to one of the three above. Bond insurers, American Capital Access (ACA), Municipal Bond Insurer Association (MBIA), Financial Guaranty Insurance Corporation (FGIC), American Municipal Bond Assurance Corp. (Ambac), etc. provide insurance policies called credit default swaps in complex transactions. So if Citigroup, BearStearns, Florida State University, Port Authority of

the bond insurers to split their alleged profitable municipal bond portfolio (Warren Buffet offered $800 billion) from the structured finance side, which is bleeding money from the subprime crises. FGIC is pursuing this course while MBIA and Ambac are opposed. All of the bond insurers are undercapitalized but FGIC has greater exposure to the subprime debacle. FGIC has 54% of its collateralized debt obligation tied to the subprime industry as opposed to less than one-third by the others. Legal analysts are saying litigation is in the offing. The problems do not stop here. The groundwork is being laid for a bailout of the bond insurers and/or the Port Authority of NY/NJ, Baltimore or Anytown, USA were selling bonds to finance improvements such as bridge repair, building a new stadium with public funds, adding a wing to a hospital or a new dormitory, the bonds would be sold to investors backed by the rating of the bond insurer.

The corporate bonds (structured finance) include instruments collateralized with subprime loans. Well, over the next two years, bond insurers will be required to payout an estimate of $200 billion, due to subprime defaults. This is only the beginning of the deterioration. Because of the losses accumulated to date from the subprime crisis, rating agencies (Standard & Poors, Moody's and Fitch) are threatening to lower the AAA rating on their bonds. FGIC, the third largest bond insurer, has been downgraded by Moody's, Ambac was lowered to AA by Fitch, Security Capital Assurance has been lowered to A by Fitch. But all 7 of the bond insurers are under review by the rating agencies. When one of them is lowered below AAA by all three agencies, you will see a huge swing in the stock-market because pension funds cannot invest in securities or bonds with a rating less than AAA. The issue is multi-layered.

The NY Insurance Commissioner and Governor are proposing a split within the bond insurers. Remember, bonds are public and private. NY wants the bond insurers to split their alleged profitable municipal bond portfolio (Warren Buffet offered $800 billion) from the structured finance side, which is bleeding money from the subprime crises. FGIC is pursuing this course while MBIA and Ambac are opposed. All of the bond insurers are undercapitalized but FGIC has greater exposure to the subprime debacle. FGIC has 54% of its collateralized debt obligation tied to the subprime industry as opposed to less than one-third by the others. Legal analysts are saying litigation is in the offing. The problems do not stop here. The groundwork is being laid for a bailout of the bond insurers and/or the Port Authority of NY/NJ is behind the idea of a split. Bershire Hathaway would not have offered to purchase the Municipal Bond side if they (Warren Buffet) did not think there was some leverage in the deal for them.

Please be outspoken about what you think? Thank you very much.

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Ed Tse

richvalley - Florence, TX

Very interesting post.

Okay, it is terrible I admit. But, what a piece of cake for $200 billion loss compared to some analysts' estimates of $2-4 trillion loss of the whole financials for the years to come! Thank you for your kindness to just mention the tip of an iceberg to avoid knots in my stomach.

I am just wondering what we could do about it if California had the so-called "over due" BIG earthquake? No insurer is able to handle the huge catastrophe at that magnitude. Nobody is at fault, except the Mother Nature. Maybe, the only thing we can do is to say, "let it be. God bless America!"

I know, it is not a good comparison. A natural course is totally different from an artificial one made by those greedy and reckless financial gurus. If our national system is failed to prevent it, we have no way to be excused and have to face the consequence, even though, as an individual, we have very little control over the situation.

What can we say? We are not an individual full of perfect freedom, but a human being living in a civilized society or organization at the mercy of our big brothers. Sounds sad or devastating. Can we survive?

Even our economic system is submerged in the tail-span of downturn, there seems no head to be pulled out of the Sand. But trust me, some lose and some don't (even win big in the mess others said, or the big transition that I preferred). Tomorrow will be better if you know how to rightly take a response against the challenge.

Aug 13, 2008 08:08 AM

Rita and Ferris Browner

Rent-to-Own, Real Estate Coach, Credit Restoration - Upper Marlboro, MD

Certified Bankruptcy Preparer/Legal Assistant

Ed, thanks for your comment. It is right on time. There is a sister part to the Bond Crisis - Auction Rate Securities which is currently a scary situation because it affects us in so many ways creating bonds for our neighborhoods, infrastructure, roads and schools etc. I will be posting soon. . .

Aug 13, 2008 09:37 AM

Ron Brown NMLS #270845

NMLS ID: 40831 - Federal Way, WA

With regard to the Auction Rate Securities there is much, much more to come. Today we see that JP Morgan Chase, and Morgan Stanley will be buying back roughly $7 Billion of these from their retail clients, and pay a $25 Million, and $35 Million fine respectively. While it appears on the surface that these are legit attempts to make good, the reality is that the Fed opened their window to these investment banks to provide the funds to do so.

These Securities were marketed as Liquid (often by brokers hawking them as - just as good as cash) when they were never any such thing. They are/were long-term, closed end funds which do not have much liquidity at all -- the auctions provided that. Now that the auctions have dried up, exposing the illiquidity of these, the investment banks are being held accountable. But the fact of the matter is that the fines will never go to those who were wronged, but will be held up by political figures like trophies brought home to their fans/constituents. In the meantime, the investment banks paying them know full well that these fines are merely part of what is, in the end, a very profitable investment exercise in cash flow. The paper behind these instruments is better than sound: triple A rated, long term bonds - not subprime mortgages or student loans. Consequently, the Big Banks will not incur that much of a write-down since they can carry the illiquidity better than the little guys.

I believe we will see more of these kind of market perpetrations, as we continue to struggle through the current economic conditions. It makes me wonder, just how many $ Billions are there for us to be writing off?

Aug 14, 2008 08:03 AM

Let's Get Our Heads Out of the Sand

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