NEWS AND INFORMATION
Real Life Economics for the Small Business and Community.
In a private economic newsletter of March 3, 2008 I passed on this piece of information:
Want to worry about something you have never heard of? Note the big number and very few seem to have a handle on this. - DAve
Meet Credit Default Swaps
"Anything else we should be paranoid about? Well, as long as you're asking, there are those Credit Default Swaps and Credit Swaps waiting in the wings. These make a lot of people nervous thanks to sheer scale; the best guess as the current amount of outstanding swaps is close to $50 trillion. How ugly might that get? No one knows – that's the problem. It's important to add that these derivatives were designed as hedging instruments so (we hope) most of that big total is swaps that will effectively cancel each other out. That's the theory. Given how many outstanding swaps seem to exceed debt instruments created in recent years you have to suspect someone is using them to leverage up. Cynics point out with more than a little justification that assumptions about other markets having little "dumb money" involved proved to be highly optimistic. This market is a "gray area's gray area" so the odds of getting any meaningful answers or market statistics are slim. We just have to hope it doesn't blow up on us. Stay tuned."
On June 23rd, I sent this alert out to a few people: "I am sending this one particular note out today because one of the main functions of the Real Economy project is to show how global affects local. This is a specific warning targeted at the Cities troubles. - Dave"
"In one fell swoop, Moody's has downgraded MBIA's ratings by five notches and Ambac's by three. In turn, this is threatening the finances of hundreds of thousands of states and local governments that are covered by these two giants of the industry.
The entire bond insurance system — whereby issuers of municipal bonds and mortgage bonds could effectively "buy" a higher rating simply by taking out some insurance — has always been questionable. Now it's a house of cards, and it's crumbling. Result: Another wave of bank losses and write-downs that could exceed the losses from the housing and mortgage crisis."
Supported by this: NEW YORK, June 24 (Reuters) - MBIA Insurance Corp's credit default swaps are trading at levels that imply the world's largest bond insurer is one step away from default following a downgrade by Moody's Investors Service last week.
The cost to insure debt against a default by MBIA rose to a record of 42.5 percent upfront, or $4.25 million to insure $10 million of debt plus 500 basis points for five years, up from 39.89 percent on Monday, according to Markit Intraday.
Based on Monday's close, the credit default swap levels imply the bond insurance unit of MBIA Inc (MBI.N: Quote, Profile, Research) is trading as if it were rated "C," the lowest speculative level before default, according to the credit strategy group of Moody's Investors Service.
Moody's last week stripped the bond insurer of its last triple-A rating, cutting it five notches to "A2," the sixth highest investment grade. Standard & Poor's and Fitch Ratings rate it "AA," the third highest investment grade.
The downgrade by Moody's was more severe than expected, and the company said it may now need to put up nearly $7.5 billion to meet collateral posting requirements and potentially pay off obligations following Moody's action.
MBIA also said it has $15.2 billion of assets available to satisfy these requirements.
Credit default swaps on bond insurers have been rising since they lost their top ratings as dealers and managers of some synthetic collateralized debt obligations hedge their exposures to the companies, said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California.
Synthetic CDOs are portfolios of credit default swaps that are divided into tranches of varying risk and returns.
"There is also potential forced selling by CDO tranche holders who have seen downgrades and are no longer able to carry the non-AAA debt," Backshall said.
Credit default swaps on second largest bond insurer Ambac Assurance (ABK.N: Quote, Profile, Research) also rose on Tuesday, according to CMA Vision. The cost to insure $10 million of debt against a default by Ambac rose to 38.5 percent or $3.85 million upfront plus 500 basis points for five years from 35 percent on Monday. (Reporting by Anastasija Johnson; Additional reporting by Karen Brettell and Dena Aubin; Editing by Leslie Adler)
DOWTOWN BUSINESS ORGANIZATION?
Any body home????
CITY BOND DEALS ? - NOT!
Or, the price of easy money.
Just looking at my home town as an example (Bainbridge Island, WA.) you can see an example of an awareness starting to emerge among local leadership that, "this isn't Kansas any more" and it is happening all across the nation and in other countries. But if you knew where to look you could see it coming. But local leaders don't want to hear that. So we play the crisis game again, and again, and again...
Notes to left will give you a clue.