Research Zeitgeist: The end of the monoline?
The death rattle of the monoline bond insurance business as we have known it could be heard loud and clear this week, with Moody’s whacking in what looks like the final nail in the business model with its downgrades of Ambac (NYSE: ABK) and MBIA (NYSE: ABK). The companies may yet end up surviving, but not in anything like the same form. FT Alphaville offers a good roundup of their unraveling. The monolines’ travails puts credit default swaps in the spotlight, notably in how they might be treated in a bankruptcy scenario.
The Good (Goldman Sachs), the Bad (Morgan Stanley) and the Ugly (Lehman Bros) survived their first quarter earnings announcements in decidedly varied shape, but the debate rages on as to how much more subprime and related writedowns and losses lie in store for them and other financial institutions. Subprime-shorting hedge fund darling John Paulson thinks banks are only about a third of the way through $1.3 trillion in writedowns and losses. Yet the OECD this week reiterated its estimate of eventual losses at $300-$400 billion, in its latest Financial Market Highlights. The OECD argues that “mark-to-market” estimates are not always a reliable indicator and says that while such losses are quite substantial, “relating them to the size of the banking sector more generally they seem less burdensome.”
Also, a USD 400 billion loss would correspond to less than 2% of the USD 22 trillion US equities outstanding, and to a not very abnormal daily decline in the US stock market.
Part of the discrepancy among estimates likely lies in what is included, with lower ones limited to specifically subprime mortgage instrument losses and larger ones also including broader credit markets losses from automobile, credit card and other debt.
Evidence that more pain lies ahead came from Citigroup’s admission that it may have to take “substantial” subrime-related writdowns in the current quarter.
Persistent high oil prices appear to be driving changes in consumer behavior, including reduced automobile traffic (but increased online traffic) and a shift to more fuel-efficient vehicles. The big question is the extent to which these changes will stick, or whether consumers will revert to old habits once they adapt to higher prices.
Research Recap Quote of Week:
In effect, the CDS market has morphed into a highly speculative, unregulated arena where fortunes are made and can be quickly lost — quite the opposite of its original intent, which was to create a vehicle for mitigating risk. - Jim Kaplan, Audit Integrity.
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