Fannie, Freddie and MBIA, Oh my!
Mish has done it again, an excellent commentary on MBIA's recent downgrade to "strong sell" by S&P. A significant and unprecedented downgrade which was completely downplayed and glossed over by the media.
Its just a downgrade, so what's the significance?...For those not familiar with MBIA, it is engaged in providing financial guarantee insurance, investment management services, and municipal and other services to public finance, and structured finance clients on a global basis.
Ok, so MBIA insures equity and bond issues. Why were they downgraded? MBIA is now restating financial results dating all the way back to 1998. MBIA has $6.6 billion of equity book value compared to $490 billion of guarantees.
If they were a bank, I would be scared, the reserve level is nominal compared to the potential obligations. With the derivative's exposure, that's a highly leveraged and potentially volatile situation.
A very similar situation to Fannie (FNMA): $1 trillion in assets and $1 trillion in notional (or face value) derivatives exposure, with only $26 billion of equity. Said differently, $26 billion of equity is holding up an asset and derivatives book that is about 20% of our national GDP. More detail on Fannies situation in the links below.
An excerpt from Mish's lucid and erudite analysis... If MBIA has a problem, then stocks and corporate bonds are going to have a problem. If MBIA has a huge problem there is bound to be a massive problem somewhere else. MBIA is enormously leveraged in derivatives. Get over there and read it.
Mish's GET Analysis: MBIA, Fannie & GM
Shrinking Fannie
Fannies Hole Gets Bigger
A Real Fannie Spanking
More Fannie Trouble
Fannie in Big Trouble
Its just a downgrade, so what's the significance?...For those not familiar with MBIA, it is engaged in providing financial guarantee insurance, investment management services, and municipal and other services to public finance, and structured finance clients on a global basis.
Ok, so MBIA insures equity and bond issues. Why were they downgraded? MBIA is now restating financial results dating all the way back to 1998. MBIA has $6.6 billion of equity book value compared to $490 billion of guarantees.
If they were a bank, I would be scared, the reserve level is nominal compared to the potential obligations. With the derivative's exposure, that's a highly leveraged and potentially volatile situation.
A very similar situation to Fannie (FNMA): $1 trillion in assets and $1 trillion in notional (or face value) derivatives exposure, with only $26 billion of equity. Said differently, $26 billion of equity is holding up an asset and derivatives book that is about 20% of our national GDP. More detail on Fannies situation in the links below.
An excerpt from Mish's lucid and erudite analysis... If MBIA has a problem, then stocks and corporate bonds are going to have a problem. If MBIA has a huge problem there is bound to be a massive problem somewhere else. MBIA is enormously leveraged in derivatives. Get over there and read it.
Mish's GET Analysis: MBIA, Fannie & GM
Shrinking Fannie
Fannies Hole Gets Bigger
A Real Fannie Spanking
More Fannie Trouble
Fannie in Big Trouble
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