Comments on: MBIA’s volatile credit protection A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: macadam Fri, 18 Feb 2011 14:48:21 +0000 The testimony has little to do with MBIA’s credit swap tightening. It really started on Monday with a Bloomberg story by Shannon Harrington that reported on plunging spreads as the smart money realized the insurer was far healthier than most people believe.

The dumb money in the trade? Morgan Stanley. After that it’s been a piling on of investors trying to replicate the trade by of one of the best CDS dealers.

Guess Salmon doesn’t have market sources, or the right ones, anyway.

By: Danny_Black Fri, 18 Feb 2011 11:38:21 +0000 Quick translation of what the MBIA guy is saying:

We didn’t bother to do any proper due diligence on the debt we were insuring because traditionally it was money for old rope. Now we have lost a ton of money we are pointing the finger at the banks because traditionally this is the one-way bet clients have with the sell-side. Needless to say we will not be correcting the description of our company to the more accurate – “A company run by a bunch of overpaid incompetent dimwits who just followed the herd into a profitable market. A shaved chimp could do our job better”.

Oh and you are not meant to “make money” on a hedge, the point is to limit the downside on your overall trade. I know that the people over at ZeroHedge hope one day to get past page 1 of “Finance for complete idiots” but once they do it is on page 2.

By: donnde Fri, 18 Feb 2011 04:09:44 +0000 all you people crack me up about the insurance burden, by the way you all calculate things all life insurance would be basically worthless. What would happen if everyone died in a certain pool of insured. There would be no money. Do we expect this to happen…no we don’t…just like we should not expect millions to default all at once. The reason for the high default is due to bad credit and lending habits.

It like insuring a group of people for life insurance and all of them have cancer, but you are not told and in fact you are assured they are an average group.

By: y2kurtus Thu, 17 Feb 2011 22:53:50 +0000 I guess the larger issue is the whole business model of insuring for the end of the world looks pretty flawed does it not?

Lets make a deal I’ll take on 2 trillion dollars of risk slowly over time for… oh I don’t know 10 billion in premium. Then when everything goes south I’ll refer you to the fine print and say that you missrepresented the risk… the whole system is a sham.

The FDIC system works because of (and only because of) the federal backstop. Taxpayers have never directly spent a penny on FDIC insurance because the clean banks pay for the dirty ones… however in times of crisis only the link to the “full faith and credit” via the treasury backstop prevents bank runs. Ask Shelia she’ll tell you the same thing.

Insurance providers have no such divine backstop and so you get what you paid for… insurance that’s basically uncollectable. It still probably serves it’s purpose though… you can tell your widow and orphan investors that their crap bonds are safe because their insured… they bought it the last time around they’ll probably buy it again right?

By: Greycap Thu, 17 Feb 2011 20:45:37 +0000 “anybody who had bought protection on MBIA is facing significant margin calls …”

Yes, obviously.

“… and mark-to-market losses”

No, not in general. The whole point of a *hedge* is to lose money when the thing you are hedging gains. The liquidity demands might be gruesome but mtm accounting rules reflect the credit gain in the asset. Of course, in this case the asset might lose too, if MBIA succeeds in repudiating its insurance; then the CDS would be Texas hedge. But that is not a general property of CDS.

“MBIA’s credit default swaps could go even lower if Morgan Stanley is forced to close its position”

It is doubtful that anybody will be “forced” to do anything; MBIA is pretty small potatoes compared to the CVA losses realized when spreads came back down in 2008. But when you delta hedge a credit exposure with CDS, you have negative gamma, meaning you sell your losers and buy your winners when you rebalance the hedge.