The Wrath of Bond Insurer Downgrades

A: Via the WSJ's Real Time Economics, Ben Bernanke outlined the risks to the financials if the monoline bond insurers get downgraded by the dis-respected, dis-credited ratings agency's. Trust me, when the head of the FOMC states this kind of concern you know its a ticking time bomb and that they are going to bring in anyone with bomb disarming experience or potential to help stop it from going off.

Via Real Time Economics (letter):

Federal Reserve Chairman Ben Bernanke said a downgrade of the monoline bond insurers could leave banks exposed to losses on insured securities and force them to take back onto their balance sheets insured securities held by others for which they have provided liquidity and credit guarantees. “Banks could be required to bring a sizable volume of assets, especially municipal securities, onto their books,” he said.

“Given the adverse effects that problems of financial guarantors can have on financial markets and the economy, we are closely monitoring developments.”

Late yesterday, Warburg agreed to take on another $750 Million investment in MBIA as the company desperately tries to raise capital to avoid a downgrade of it's critical 'AAA' rating. Sounds like good money going into bad to me. Anyone else recall Bank of America's investment in Countrywide Financial at $18/share? The stock popped to $23, for a few days, before heading on its downward path down to $5/share where BAC decided to just buy the whole company out.

Only 1 week ago, MBIA did a very shady conference call to re-assure investors that they won't go insolvent, as they answered pre-selected written questions emailed from analysts the night before. The call on JAN 31st, the next day, could ONLY be positive spin as the company answered the questions they chose. TheStreet.com had the story where MBIA said a recently closed cash infusion by Warburg was sufficient to maintain their 'AAA" rating as the CFO called those who question their business 'fear mongerers':

The company, which has received a cash infusion by private equity firm Warburg Pincus, underscored that it has sufficient funds to meet or exceed rating agency's capital concerns and voiced its belief that it is well positioned to go forward.

"It is virtually impossible to imagine a circumstance in which MBIA would become insolvent," said CFO Charles Chaplin, answering one of a litany of questions submitted by Ackman just prior to the start of MBIA's marathon call. What was not clear on the call, however, was what the future of the franchise might look like going forward as competition increases and further downgrades loom. Indeed, about an hour after the MBIA call wrapped up, Standard & Poor's placed MBIA on watch for a downgrade with negative implications and cut Financial Guaranty Insurance Co. to double-A from triple-A.

Now, only 7 days later, MBIA issues common stock to Warburg for another $750 Million. Does this sound like all is well to you? Why do we even believe the words that come from these CEO's mouths? After all we have been though with Enron, Worldcom, Global Crossing, Tyco, and recently Countrywide. Who recalls CFC's CEO claiming this quarter would be profitable late in 2007? Ha! What a farce as they reported $400 million in losses.

Folks, this is what happens when you try to sell chicken shit as chicken salad! If it smells like shit, looks like shit, then it's shit! With regard to today's problems, wall street wrapped up subprime chicken shit, gave it a makeover, and sold it to investors/banks/brokerages/hedge funds as 'AAA' chicken salad. Well, the financials ate too much chicken salad and now their breath smells like shit.

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