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The King Report

M. Ramsey King Securities, Inc.
Tuesday February 26, 2008 – Issue 3821 "Independent View of the News"

Here’s the compelling question: Why did S&P make a public AAA ratings reaffirmation on the twokey monoliners while a bailout for AMBAC was reportedly at hand?

Once again only the British media has answers. The Times: A proposed $3 billion (£1.5 billion)bailout of Ambac, the bond insurer, by a consortium that includes Barclays and Royal Bank ofScotland could be at least a week away and may not be enough to rescue the firm… Ambac couldneed far more than an extra $3 billion and are moving to ensure that the rescue does not open them up to unlimited liabilities.

And get this important disclosure that S&P apparently ignored or didn’t know: MBIA, Ambac’s rival, was yesterday notified that it was being sued by the law firm Coughlin Stoia Geller Rudman & Robbins for allegedly issuing false and misleading statements about its exposure to CDOs.

http://business.timesonline.co.uk/tol/
business/industry_sectors/banking_and_finance/article3434636.ece

The S&P AAA reaffirmation obfuscated negative news for both AMBAC and MBIA – no imminent bailout for AMBAC and MBIA being sued over CDO exposure reporting. This news would’ve disturbed the market, which would’ve reacted violently because it was expecting very good news.

After Monday’s close, MBIA said it would stop insuring asset-backed securities for 6 months and separate municipal insurance from asset-back insurance within five years…Who can wait 5 years?...CEO Jay Brown asserted, "We can expect a bumpy ride over the coming months and possibly longer."

MBIA, which raised $2.6B over the past three months, insures $673B of municipal and asset-backed securities. How are a couple billion dollars enough to remedy their problems?

Pundits aver the dubious S&P AAA rating reaffirmation for monoline insurers boosted stocks because the market is relieved that there won’t be imminent write-downs for banks, brokers and wise guys.In other words, S&P’s AAA reaffirmation keeps financial concerns from marking some of their crappypaper to reality and allows people to continue the charade that all is well so the stock market and consumer confidence can survive another day. And some believe the markets are efficient & rational?!?

Late night the WSJ reported: FDIC Readies for a Rise in Bank Failures The Federal Deposit InsuranceCorp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen. The FDIC is looking to bring back 25 retirees from its division of

resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

http://online.wsj.com/article/SB120398607404892
133.html?mod=hpp_us_whats_news

You wanna bet the FDIC story will be mostly ignored even though it’s highly significant?

Barry Ritholtz: MBI was forced to sell surplus notes at par that yielded 14% during that capital raise - that is way above junk bond levels. In the markets, it’s trading between 97-100. The US Govt is AAA, GE is AAA, Exxon Mobil, Johnson & Johnson, Berkshire Hathaway and Northwestern Mutual are also AAA.

Peter Boockvar of Miller Tabak: "What S&P is saying is that a bond yielding 14% in the marketplace is also AAA. It's now a game among the rating agencies, regulators and banks with whether the bond insurers are rated AAA or not when they clearly are not and their securities don't trade as they are. This is being done in an attempt to prevent the banks from going through another round of writedowns."

What of Ambac? Any hope of its AAA ratings reaffirmations are likely contingent upon a deal going thru -- and if it falls apart so, do any hope of AAA ratings for Ambac. What this really points out is how worthless and corrupt the S&P and Moody's ratings actually are.

Forget that the foxes are watching the henhouse, it appears that the regulators, banks, insurers, and SEC,Federal Reserve -- pretty much anyone else you can think of -- are all in cahoots with each other. It’sAmerican Socialism at its finest…

http://bigpicture.typepad.com/comments/2008/02/monoline-rescue.html

Monday trading commenced under the pall of negative news for financial stocks. No AMBAC bailout appeared. CIBC analyst Meredith Whitney said Citi might show a quarterly loss. Goldman said the following write-down might occur: Bear Stearns $1.4B, Citi $12B, LEH $3.5B, MER $4B, JPM $3.4B and Morgan Stanley $3.1B…Goldman downgraded Fannie Mae, Freddie Mac and Wachovia.

Also weighing on financial stocks was ubiquitous commentary about deteriorating credit spreads.Credit spreads have doubled YTD; but equities have declined just 10% YTD. The spread between corporate bonds and 10-year Treasuries is about 300bps, the widest since the Depression.

Barron’s notes leveraged loans are trading about .88 on the dollar, which implies a default rate of 10% to15%. This would be a record default level and is higher than the implied default rate on junk bonds.

What is striking about the loan market trading so ugly is the Fed over the weekend tried to mollify market fears about the collateral it was accepting by stating that half of the collateral it has accepted is loans.

Monday’s FT: Fed’s collateral book mostly in loans More than half the collateral backing cash advances made by the Federal Reserve to banks operating in the US is in the form of loans rather than securities, the New York Fed has told the Financial Times.

This is the first time the Fed has offered any insight into its collateral portfolio, and the news is likely to diminish market concerns about the nature of the assets backing the Fed loans.

http://www.ft.com/cms/s/0/69f8e9c6-e326-11dc-803f-0000779fd2ac.html

-END-

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