Auction Bond Market Worries Spread To Student Loans

A: I am by no means an expert on bond auctions and would love to hear/learn from anyone who reads urbandigs and knows about this market to elaborate on the situation! Is it big news, non event, a sign of the times, or just good gossip? There is also the coming auction for the Blackstone buyout of Hilton coming up and many are looking to that event as the most up to date gauge on the health of the commercial lending market. Now this is Hilton we are talking about. A footprint, earnings and a strong brand. This should work, so investors I talk to are more curious about the level of success in this fund raiser for any additional warning signs.

According to Bloomberg article , "Auction-Bond Failures Spread to Student Loan Debt":

College Loan Corp., a San Diego- based lender, said some bonds it issued with rates determined through periodic auctions failed to attract enough bids. Demand for bonds in the $360 billion auction-rate securities market is waning on investor concern that dealers who collect fees for managing the bidding on the bonds won't commit their own capital to prevent failures. Reduced appetite for auction-rate debt in the municipal market also reflects expectations that the credit strength of insurers backing the securities may deteriorate.

Auction bonds issued by Sallie Mae, the largest student loan lender, also failed to attract enough bidders last week, according to a report today by Keefe, Bruyette & Woods, a New York-based securities firm. "It seems that the dealers are no longer willing to bid in large amounts for these issues," said Lee Epstein, chief executive at Money Market One, San Francisco-based securities firm specializing in short-term securities.

In the municipal market, at least two auctions run by Lehman Brothers Holdings Inc. failed on Jan. 22, the first day the bond investors could react to a ratings downgrade of Ambac Financial Group Inc.'s main insurance units.

This last part is the most interesting. Gasparino was talking today (CNBC: Watch Video Now) about the REAL ramifications of a major bond insurer downgrade, and that was a disruption of the muni bond market! Should the downgrades come, a "massive disruption" in the trillion dollar municipal bond market will begin spreading shock waves to financial institutions, hedge funds, state pension plans, and on and on. This is the real concern should Moodys, S&P, or Fitch downgrade an Ambac, or MBIA's credit rating. And according to Garsparino, this is the type of bailout structure that is trying to be reached, not a bailout for losses sustained on the market sales for holdings of residential mortgage backed securities. Those losses would come as a new wave of write downs should the bond insurer downgrades come. Nobody is denying this.

Jeff touched on this exact scenario months ago: Tentacles of the Credit Beast (November, 2007)

Now according to Business Week there has only ever been one money market fund that "went bust" and investors got back 96 cents on each dollar. So nobody panic. However, it is concerning that funds regular folks depend on as essentially riskless are having some problems - it makes you wonder just how tangled a web has been weaved here. So lets tackle just one more curve ball. Municipal Money Market Funds.

Municipalities and public institutions like hospitals use bonds to finance themselves and over the years, even those with lower credit ratings have been able to access capital markets easily by using bond insurers to help them attain investment grade status. These same bond insurers also insured CDOs and sub prime CMBSes and as a result of the sub-prime credit debacle stocks of the insurers like Ambac have gotten creamed this year. People are worried about how much of a hit they will take on the insurance they have written. As a result, municipal bonds backed by these same insurers are getting roughed up, raising the cost of new bond issuance by municipalities. You see this credit crunch keeps branching out and side swiping otherwise innocent bystanders. Thus far the wounds have not been particularly bad, but it has created an environment of risk aversion, which makes sense, but also raises the cost of doing business for most participants in the economy....Oh what a tangled web we weave!

Jeff hit the nail on the coffin three months ago..."Oh what a tangled web we weave!" Here is news. Manhattan real estate is still active during the generally active bonus season! Thank god I have something else to discuss daily.