Doug Noland's piece this week is interesting.
prudentbear.com
Basically he's talking about how the major issuers of GSE's
feel secure because of insurance provided by debt insurers, whereas, the debt insures find comfort in how well the issuers are doing and how well their business is growing.
"Looking at the “Big Four” Credit insurers in aggregate,(MBIA, Ambac, FGIC, FSA) we see “net” (gross less reinsured/ceded exposure) insurance in force of a staggering $1.8 trillion. A total of $11.7 billion of “statutory capital” and $36 billion of total assets supports this mighty risk mountain – a net risk to capital ratio of 153 to 1. Furthermore, total outstanding net exposure increased $211 billion during 2001, up (48%) from year-2000’s $142 billion increase. And right here is illuminated the same dire dilemma that will dog the GSEs: Having become the key risk “mitigator” in their respective Credit-induced Bubble markets, and as fragile debt structures begin falter, these institutions will only be called upon to shoulder an even larger risk burden. This is one huge problem! Not only are the Credit insurers writing more policies to riskier asset classes, this exponential increase in actual risk is occurring right as we dive headfirst into acute systemic financial and economic problems. "
Of course the flaw to the system is that if indeed the issuers run into trouble the insurers with a net risk to capital ratio of 153 to 1, may not be able to cover the risk which would lead to a breakdown as there would be no where else to turn, well except you and me, the taxpayers.
Noland closes with this.
" But it’s a very strange and different world than what we’ve known. If you turn the other way and walk a few steps, the sun shines warm and bright. The flowers simply could not be more beautiful, as they dance with the comfortable warm breeze; the birds chirp and sing like there’s not a care in the world. Indeed, “profits” for The Clan of Seven - Fannie Mae, Freddie Mac, the FHLB, MBIA, Ambac, FGIC, and FSA - have never beamed so bright or appealingly. And to even contemplate the possibility that any one of these pristine risk managers could lose their Triple-A ratings, well that’s sacrilege. So what, in the grand scheme of things, if we’ve got a few tens of billions of corporate debt turning sour? With the Clan’s backing and the moral support from the rating agencies (and surely after WTC we have no doubt as to unconditional aid from the Fed and Treasury), somewhere in the vicinity of $5 trillion of securities are carefully protected from harm’s way. And with no other Clan anywhere in the world possessing the capacity for creating endless quantities of top-rated securities and liquid markets in which to trade them, it does at times appear a wonderful U.S. monopoly of secure prosperity. That is, however, as long as you don’t turn around and gaze in the direction of the dark clouds – if you don’t look, you’re safe from what might be a frightening glimpse of a forming funnel cloud. Just stare at the flowers and listen intently to the birds – stare at the flowers and listen to the birds – the flowers and the birds... And don’t dare look at the true wherewithal hidden by all by the Clan’s pomp and circumstance, or ponder their strategies, or enquire how they and their cohorts will react in time of crisis.
For years the unquestioned power of the Clan has been a thing of myth and legend. We don’t even like to contemplate the ramifications for when the sorry truth is exposed. In truth, buried in a sea of complexity and obfuscation is a rather simple bottom line: there is an egregious and growing amount of systemic risk domiciled in a limited number of fragile hands. And while risk is expanding exponentially, the number of hands happy to carry it is in marked decline. No one ever thought it would be like this."
The link again if you want to read the whole thing. I left a bunch out.
prudentbear.com |
