Restating the obvious . . .
seekingalpha.com
"A group of eight banks that are major counterparties to Ambac Financial Group (ABK) may recapitalize the struggling bond insurer in a bid to save its crucial AAA rating, two people familiar with the situation said Friday." So went the Marketwatch Headline. This story, nothing new really, other than the "progress" in negotiations was "broken" on CNBC by Charlie Gasparino during the last hour of trading on Friday. It was good for a quick 200 point, broad based rally. Why does a company like Costco gain $500 million in market cap because AMBAC is getting bailed out? Well, it has to do with market risk and the pervasiveness of this credit crunch. Does this somehow help consumers buy more products at Costco, who knows? But, it sure made the stock feel good.
My feeling, however, is that other than some shorts getting crushed and some longs getting a brief respite, nothing really changed. Kicking the can down the road is something that we seem to excel at as a nation. So, what does this mean practically speaking? I would love to see some genuine comments and discussion. Here is my forty cents, which was really 2 cents but I have leveraged it up 20 times.
First, these banks are so worried about how a downgrade would impact them that they are willing to commit their own scarce capital to prevent it. How leveraged are they to these insurers? Who knows, but this deal is a meaningful anecdote. Besides a direct impact on directly held securities insured by AMBAC, these banks are protecting their hedge fund loan clients and preserving the marketability of billions of dollars in securities which serve as loan guarantees. What is it now, $500 trillion in notional value for all the various financial engineering products? Hate to see that come toppling down, at least in a "disorderly" fashion.
Second, it is obvious that the entire opaque system of financial "products" needs to unwind. As it turns out, we are finding out that consumers no longer need a bunch of clever gadgets (sorry Sharper Image). Maybe the financial system really doesn't need so many clever "products" which were probably always doomed to failure. Seriously, when you get to a point that you have sliced and diced Joe Six's mortgage so many ways that 17 people have a job based on his ability to pay over time, there is a problem, right?
Third, as this all unwinds, real losses are going to continue to be felt. This action is just a temporary fix, right? Nobody really thinks that things all of a sudden things are all better. We are all adults here. Does anybody remember when, during the dot bomb era, companies like Lucent had to lend their clients billions to buy their products and keep the party going? It worked for a while and judging by the stock prices back then, we all "believed" that those loans would get repaid, right? Lucent had it's "counterparties" in 1998, and how did that work out? I know it is not a perfect analogy, but does anybody see any similarity?
Fourth, what about the counterparties' counterparties? As I understand it, AMBAC and its ilk have set up or hold major stakes in reinsurers that reinsure their insurance. Say that three times fast. For some reason, these reinsurers seem to favor the Bahamas to house their "offices." Well, who is going to backstop them? I know, I know, these reinsurance companies are nothing similar to the "off balance sheet entities" that Enron created to hold their own dirty secrets. How could you even think that!
Finally, the more I think about it, the better I feel. I can't believe that we only rallied 200 points!
Disclosure: Long SKF |
