Cknolls

ACA is not even in the top three bond insurers. MBIA, AMBAC, and FGIC are the top three, and none of them deserve a AAA Rating. But , the ratings agencies do not want to downgrade Ambac or MBIA because it woould trigger the re-rating and possible forced sale of $2.5 trillion in municipal bonds. MBIA backs $652 billion of municipal and structured finance bonds. Ambac, the second largest bond insurer, guarantees $546 billion of securities. FGIC corp. insures $314 billion.

How are MER and BSC and other banks going to bail out the bond insurers, when they need capital infusions themselves?

BTW, ACA was de-listed from NYSE last week. Tradind .40 OTC on Tuesday. S&P kept its rating on ACA at A until today. These credit ratings agencies are another mess unto themselves, totally behind the curve.

What happens to the stock prices and balance sheets of the investment banks when the gains they reported from the protection they bought from the bond insurers turns out to be for nought? It is a zero sum game, and the protection they bought will result in losses for the firms they hedged with. But if you put trades on that worked so well that you bankrupt your counterparty, you will not collect on those trades. Hence, we have MER, BSC and other major banks in talks to bail out ACA CAPITAL Holdings,which lost $1billion, a bond insurance company that has guaranteed $26 billion in mortgage securities. If this action fails the banks will be forced to take on billions in losses they had insured against.

Makes me want to run out and buy the magazine.

QUOTE(NorthSideSox72 @ Dec 12, 2007 -> 03:16 PM) Your random sentence fragments make for strange posts. What are you talking about? The FED manipulating the stock market.

Can you say MANIPULATION.

Correction. LEH reports tomorrow (THUR), not FRI.

Is Boom Boom setting us up for another surprise rate cut? Maybe during options expiration? Thin tapes the rest of the year. Ben is engineering the ASSET DEFLATION EXPRESS TRAIN. Where and when it stops, only he knows.

Will LEH have a surprise for us on FRI? I think they are hiding something in their closet. Support is now resistance. When will Boom Boom realize his quarter point Band-Aids are not for broken bones?

We blew through two important support numbers so far. 1501.828 is the 50 DMA. And 1485.043 is the 200 DMA on SPX. We are still in a down trend. I think we see 1300's before 1600's. I would feel more comfortable if we were to go a little higher on the SPX before selling off, but mkts have a mind of their own and so far today is the third lower high.

QUOTE(Balta1701 @ Dec 11, 2007 -> 01:52 PM) So, the market got a 1/4 point cut today instead of the 1/2 point cut it was talking about, and right now it is hanging out at around that 1490 level Nuke referred to. What's your point?

QUOTE(NorthSideSox72 @ Dec 11, 2007 -> 10:07 AM) You are mischaracterizing derivatives markets. What you are talking about are OTC derivatives markets, where you assume a lot of counterparty risk. The traded markets with clearing houses are there to neutralize much of that risk. CDS' are traded exclusively (at this point) on OTC, so yes, they put people at full risk against counterparties. Where did I mischaracterize derivatives?

QUOTE(NorthSideSox72 @ Dec 11, 2007 -> 09:24 AM) As I said, I agree that the CDS market is a scary area right now, and the fact that some banks don't hold reserves to cover their callable risk on the receive side of those contracts is part of the reason. But, I wouldn't get all panicky about a market collapse or anything either. And I would also not focus so much on notional value, which is not the same as real exposure from a risk perspective. Only a small percentage of the underlying bonds are at any real default risk anyway, and only a very small percentage of those have had credit protection purchased via CDS. The real capital risk is a very small fraction of that $45T number. That isn't to say you may not see some financial institutions get clocked pretty hard by this though, if they don't cover themselves. They aren't clearing houses, and their capital is essentially multi-collateralized for exposure purposes. There is definitely significant risk there. The third domino is counter-party risk. As derivative mkts replaced cash mkts in the trading of debt, counter-party risk was created. Each CDS is a swap between two counterparties, and a broker-dealer is on one side of every transaction. In cash markets, the performance of the debtor is the creditor's only concern. In the derivative markets, the lender must also be concerned with the performance of the counterparty. Counterparty risk in the CDS market lies with sellers of protection, or the insurers of risk. Banks are the primary sellers of CDS, totaling 40% of all written CDS and representing notional exposure of $18.2 trillion. Banks claim to run hedged books, effectively serving as a market-maker in the CDS market. As evidenced in the sub-prime events, most are unable to fully hedge their risk. If you thought banks were asleep at the wheel during subprime, consider this: The "counterparty Considerations section in the Credit Derivatives Primer of market share leader JP MOragn is a single paragraph on the last page of the volume, which proclaims "the likelihood of suffering (counterparty default) is remote. Hedge funds are in over their heads as well, as they are sellers of 32% of all CDS, insuring exposure of $14.5 trillion. Recent estimates indicate the entire hedge fund mkt has approx. 2.5 trillion in net assets under management. Thus, hedge funds are bearing risk in excess of their ability to pay the piper if anything goes wrong.

CDS' are the first domino. The second is the High yield bond mkt, aka "Junk Bonds". Each year since 2004, more than 40% of all new debt held ratings below investment grade. For perspective, the proportion of new paper of such poor quality issued in each of the last four years far exceeded the proportion of such issuances in any year since the late 1980's. Defaults of high-yield bonds within the first five years of issuance occur 28% of the time for those just below investment grade and 47% of the time for those with the lowest ratings. A disproportionate amount of low grade paper hit the mkt in recent years, but that was not all. Investors were not compensated for taking risk. High-yield spreads over Treasury yields have hovered around historical lows for four years. Making matters worse, approximately 1/3 of all sinlge-name CDS are derivatives of credits with ratings below investment grade.

QUOTE(NorthSideSox72 @ Dec 11, 2007 -> 08:18 AM) I wouldn't worry about listed derivatives counter-party risk so much. Most of those traded instruments are done top-month in contract, or within a couple periods, so your risk window is less than a year for 90%+ of your exposure. Plus the clearing houses like CME and Eurex are very, very well capitalized, not to mention when they see the slightest blip, they adjust their margin requirements immediately. I'd in fact say that since its a gigantic number in LISTED instruments, that makes me feel a little better. The place to worry is the OTC market. Swaps, for example, are getting really big really fast. And while there are some tools available to connect front offices, the settlement is still all 1-to-1. The LCH tried to start a common clearing house for swaps a while back, called Swapclear, but I think that died off. CME is now attempting the same, I believe. That will happen eventually. But in the meantime, swaps are much longer term contracts, so in that case its a double whammy of risk - extended risk periods and OTC agreements. Plus the usual potentially-infinite risk of derivation, and I can see the swaps markets going haywire if, for example, a lot of default calls occur, like you'd have in the CDS markets. And guess what? With all the mortgage mess, those default calls are in fact bound to increase. So yeah, in the OTC markets, swaps particularly, I can see a lot of risk being taken on there. The notional value of CDS(Credit Default Swaps) today surpasses the amount of underlying cash bonds by an order of magnitude. Today, CDS contracts now total $45.5 trillion of outstanding credit risk, growing an amazing 9-fold in the last three years alone. $45 trillion is almost 5 times the U.S. national debt and more than 3 times U.S. GDP. This CDS mkt is woefully undercapitalized. Sellers of credit protection post margin for marked-to-market moves, but CDS contracts are generally uncollateralized. Investment banks hold one side of each CDS transaction claim to be hedged, but their financial statements show neither loss reserves nor bad debt reserves for potential counter-party failure.

You think the sub-prime mortgage/cdo/siv/mkts are melting down, they are a drop in the bucket compared to counter-party risk in the derivative mkts. As of Q3 2007, the (BIS), Bank for Int'l. Settlements, is reporting that derivatives traded on exchangessurged 27% to 681 TRILLION DOLLARS. They also said investors may have shifted some trading to exchanges from the over-the-counter mkt to reduce the risk of counter-parties defaulting on deals.

QUOTE(NUKE @ Dec 6, 2007 -> 09:55 PM) Took only about a week to close firmly above that 1490 resistance. Barring any major bad news we're headed back for the old highs I think. I think a right shoulder is forming, 1540-1550, should complete the head and shoulders. Then we head back to the downside. These crises usually end when someone, i.e., some company goes belly up. It is just a matter of time.

Hey Kenny! Chet Lemon's available.

QUOTE(kapkomet @ Nov 30, 2007 -> 03:04 PM) f***ing insane. Not just insane, but f***ing insane. Exactly. Keep lowering rates while the real cost of money (LIBOR), keeps rising. Very smart!

QUOTE(jasonxctf @ Nov 30, 2007 -> 12:53 PM) while we may not agree with the punishment, isnt it the individuals personal responsibility to understand and obey the laws of the land in which they are in? it's ok to sell marijuana in amsterdam. so is it fair for someone to come to the US, sell it, and then complain about the punishment they receive? as american's (or in this case Europeans) you do not have a golden ticket to travel the world and dis-obey other countries laws and regulations. Like the umteen millions here illegally whose first act is breaking our laws?

Union members are clueless as to how their dues is spent. PAC donations are automatically included on their (electricians) dues notice, whether they want to support it or not. In order not to pay the PAC donation you have to subtract that amount from your dues. When my dad was still alive that fee was 3.00 every 3 mos. But they do not tell you, at least they never used to, that you did not have to pay the fee. It is tantamount to a hidden tax to support the Democratic Party.

The Fed doesn't have a Band-Aid big enough to cover up the festering wound. I'm selling the 1490 level in SPX when it touches this morning.

It all rides on the employment numbers. If unemployment starts to creep, it accelerates the recession. And the way it is setting up, there are going to be lotsa layoffs in the financial sector.

Is this a month end liquidation rally? 1466 is the 20 DMA and 1481 is the high of the previous rally attempt on Nov.14. Will we break the last hour sell-off pattern again today?