EEK! 5 YEARS TO GO!
08-04-2008, 10:55 AM
This link is about a piece that ran in the New York Post on simmering disputes between investment banks trying to unwind CDOs and monolines that provided credit enhancement. Yes, I know the Post isn't the usual place to see what amounts to breaking financial news, but it was the first out with some stories on quant meltdowns, so it isn't completely unheard of. It's from May 2008. I'm trying to learn more about this whole mess and thought you might find it interesting. Please click the link for the whole blog and comments, which are very informative.
http://www.nakedcapitalism.com/2008/05/monoline-death-watch-cdo-unwind.html
From the Post (http://www.nypost.com/seven/05272008/business/a_debt_end_for_banks_112712.htm): Battered investment banks trying to dump billions in soured mortgage securities are being challenged by struggling insurance companies that claim such efforts could cause them further pain.
It's a battle that pits large financial firms like UBS, Merrill Lynch and Citigroup against insurers MBIA, Ambac and others. These insurers, which the industry refers to as "monolines," provide specialty insurance used to protect investors from losses on various types of debt securities.
At issue is a type of protection that banks have obtained against defaults that is now preventing them from purging portions of their holdings of arcane mortgage securities known as collateralized debt obligations.
Under the terms of this protection, the banks need approval from the monolines in order to unwind these securities - and obtaining that OK is proving difficult in some cases.
For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky.
Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.
The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses. That has led to discussions about whether to waive claims payments in exchange for cash or warrants in certain publicly traded monoline companies.
"Clearly, liquidation into this market is tough but holding on long term might not be your best case," said Joe Messineo, who runs a New York-based structured finance consulting firm. "Not many people envisioned the magnitude of this would come down to documents."
None of the monolines embroiled in this battle returned calls for comment. Neither did the banks.
Although there are hardly any buyers for CDO paper, the banks would be able to unwind the CDOs and essentially purchase the assets that comprise the complex debt structures - a move that might allow them to better assess the value of the assets and at least eliminate the fees associated with holding onto the debt as CDOs.
http://www.nakedcapitalism.com/2008/05/monoline-death-watch-cdo-unwind.html
From the Post (http://www.nypost.com/seven/05272008/business/a_debt_end_for_banks_112712.htm): Battered investment banks trying to dump billions in soured mortgage securities are being challenged by struggling insurance companies that claim such efforts could cause them further pain.
It's a battle that pits large financial firms like UBS, Merrill Lynch and Citigroup against insurers MBIA, Ambac and others. These insurers, which the industry refers to as "monolines," provide specialty insurance used to protect investors from losses on various types of debt securities.
At issue is a type of protection that banks have obtained against defaults that is now preventing them from purging portions of their holdings of arcane mortgage securities known as collateralized debt obligations.
Under the terms of this protection, the banks need approval from the monolines in order to unwind these securities - and obtaining that OK is proving difficult in some cases.
For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky.
Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.
The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses. That has led to discussions about whether to waive claims payments in exchange for cash or warrants in certain publicly traded monoline companies.
"Clearly, liquidation into this market is tough but holding on long term might not be your best case," said Joe Messineo, who runs a New York-based structured finance consulting firm. "Not many people envisioned the magnitude of this would come down to documents."
None of the monolines embroiled in this battle returned calls for comment. Neither did the banks.
Although there are hardly any buyers for CDO paper, the banks would be able to unwind the CDOs and essentially purchase the assets that comprise the complex debt structures - a move that might allow them to better assess the value of the assets and at least eliminate the fees associated with holding onto the debt as CDOs.