Thursday, June 26, 2008

Slings And Arrows...

The picture above is a detail from a picture I took last night from my terrace. It depicts Lincolnshire's own Red Arrows flying over New York Harbor. I got a much less detailed view than I'd have liked, meaning that what you see looks somewhat like a prop from Blow Up.

I probably should have made more of an effort to get down to South Beach, Staten Island, which was apparently the best place to watch it, though my opinions of that Borough's beaches are well known.

I could even, at least, have tried to watch it from the promenade in Brooklyn Heights, which probably offered a pretty spiffy view. But alas I was on the phone to my mother in Lincolnshire, the homeland of the Red Arrows, and did not get home until five minutes after their 6.28pm start. My grandparents lived in the next-door village to the on-off headquarters of the Red Arrows, and I used to be a huge plane geek, though never quite a fully-fledged plane spotter.

There's something gloriously old-school about aerial acrobatics, especially in the 19-year-old Hawks flown by the Arrows. In an age when death is meant to arrive silently from the air, and most planes are painted black, there's this air of levity about the Arrows' ostentatious calisthetics that's somewhat jarring.

Shorter Fitch: Looks like MBIA and Ambac are now so screwed that there's little we can achieve by way of revenge. Oh, and heh.

Monday, June 23, 2008

Good Lord More Bad Craziness From The Monolines

There's a tricky balance going on right now in the monoline bond insurance business. How do you stay in front of the short sellers (or credit default swap buyers, whose opinion of your business prospects is the same as the shorts) without taking moves that will spook the markets? And if you decide to throw money at your reputation, not unlike some opaquely-run state oil company taking space in a "sponsored supplement", only with 50,000 times more money and no advertising commission for 23-year-old graduate trainees, how much is enough?

We had a couple of capital raisings from the big two, MBIA and Ambac, earlier this year. These stock sales, which brought in slightly less than the two hoped, ultimately weren't enough to save their triple-A ratings. FGIC and XL didn't bother, and both are now deeply downgraded. CIFG announced, with great fanfare, an impressively large infusion from its French parents. Wasn't enough.

The two monolines in the best health, Assured Guaranty and FSA, also announced capital raisings, but stressed that this was to pursue business opportunities created by the implosion of the other four. And that worked rather well. Most new municipal and infrastructure finance business has been written by FSA and Assured, with Berkshire Hathaway snapping up a little bit of new business, too.

[Slight digression here. It's weird to observe the talismanic power of Warren Buffett at work in the bond insurance sphere. Without any evidence in support, one comment I read recently announced that with a $400 million raft of business, Buffett had "taken over the industry" (I can't find it, unfortunately). That picture is, um, some way from reality, the hopes of state treasurers notwithstanding]

So, for a while now we had this neat little ordering, with FSA and Assured on top, Berkshire Hathaway as the sprightly new entrant, and MBIA and Ambac sick and old. And then Bill Ackman, scourge of the big two, started buying credit default protection on FSA. Accrued Interest, the blog to which I've linked, wondered what bit of FSA's business he was worried about. We certainly don't get any enlightenment from the Deal Journal piece, a not massively curious greatest hits space-filler.

The post's writer, Heidi Moore, even offers up this little gem, a masterpiece of empty prognostication:

Although Buffett and Ackman haven’t spoken–or so we hear–the comment affirms their mutual economic self-interest in the death of the bond-insurance industry as we know it now.

No Heidi, Buffett and Ackman share the goal of seeing all non-Berkshire Hathaway bond insurers go bankrupt. Moore doesn't bother to say which bits of "as we know it now" will live and die. Maybe she refers to the structured finance bits of their business, or the CDS bit, or the collateralised loan obligations bit, or the bits of the business that might die because of the agencies' mapping municipal ratings to the global scale. I've no idea, and suspect that she doesn't either. Let's just say that Ackman's tongue baths from reporters are getting very Buffett-esque these days.

Still, even a stopped clock, and all that, because something in Ackman's presentation certainly rattled FSA and its owner, Franco-Belgian public finance bank Dexia. From an awesomely tedious and gratuitously colorless press release that FSA put out this morning:

Financial Security Assurance Inc. (FSA), announced today that Dexia will provide a $5 billion committed, unsecured standby line of credit to the Company’s Financial Products (FP) segment, which issues guaranteed investment contracts to municipal issuers and others requiring Triple-A rated deposits. The line will have an initial term of five years and will be renewed as needed thereafter.

To give you an idea of the scale of this backstop, MBIA says it has $16 billion in claims-paying resources, and FSA has just tapped its Franco-Belgian parent for almost a third of this total to prop up its guaranteed investment contract [a way of parking cash, often the proceeds of bond sales, somewhere it will earn a tasty yield but suffer to likelihood of loss of interest or principal] franchise. What's curious about this move, is that its addressing a worry that people had about MBIA's portfolio.

Standard bond insurance caveats: No sign that the insurers can't meet their obligations. There's always the possibility that Moody's lead monoline analyst, Jack Dorer, or his counterpart at S&P will wake up one morning and decide to unleash financial meltdown before breakfast. No idea what the terms of this line of credit are, and under what conditions it might be withdrawn.

But again, $5 billion. For what was until recently an also-ran bond insurer. That had been really conservative, and certainly not encountered the slightest whiff of a downgrade. That, according to this presentation, had GIC commitments to structured finance deals that exceeded its commitments to muni deals. That, of its roughly $19 billion investment portfolio, $13.5 billion is parked in residential mortgage-backed securities, and of those RMBS holdings, almost $8 billion is first lien subprime. Ah. Maybe this was what Ackman was referring to.

Further caveats. I'm sure that the RMBS that FSA has bought is the really fragrant type in the three US markets where the real estate isn't tanking, and on which the structural protections afforded to the insurer are really tough. And the investment portfolio will not be called on all at once.

But I give in. Maybe the monolines' eternal quest for yield will send us to our doom. Maybe it will emerge that Assured has been spending Wilbur Ross' money on MC Hammer-esque fripperies. Maybe the new shape of the monoline business is capturing spread on a small number of muni deals and spending the rest of the day playing golf with the ratings agencies.

But the capacity of the balance sheets of a group of insurers, which I've always maintained are in an easy-to-understand business, to surprise me is truly frightening.

Friday, June 20, 2008

Where's The Fatima Mansions' Cut?

Why on earth do we always assume that hedge fund managers are the smartest and most devious dudes on the face of the earth? Now, admittedly, the one I'm about to laugh at did lose a bunch of money, and seems to have been so bad as a hedge fund manager that he had to turn his fund into a ponzi scheme. But does the executor of this Reggie Perrin-esque death-faking caper look like the sort of person to which one should be handing over flipping great wodges of cash?

Disgraced fund manager Samuel Israel is assumed to be on the run after failing to turn up to prison as promised and leaving a really unconvincing suicide scene behind. Let's go to the Times for the understated sarcasm, shall we?

Shortly after noon on June 9, Mr. Israel’s abandoned GMC Envoy was found along a shoulder of the Bear Mountain Bridge near the Hudson River with the message “suicide is painless” written in dust on the hood. The keys and a bottle of pills were still in the car.

When Mr. Israel’s body failed to turn up and the message turned out to be the theme song of “M*A*S*H,” authorities began to suspect he was on the run.

What's double super extra ironic about the situation is that the means of Mr. Israel's supposed disappearance mirrors the disappearance of former Manic Street Preachers rhythm guitarist Richie Edwards. The Manics' first top ten hit? A cover of Suicide Is Painless.

Tuesday, June 17, 2008

Monoline micturations

OK, so I've been reading what may well be an interesting scoop from the New York Times on the future of the bond insurers. It turns out that they have a huge amount of leverage over insurance regulators because if they become insolvent or are taken over, counterparties on their portfolio of credit default swaps could ask that these be repaid immediately. Or:

MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health. Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.

This sounds pretty horrible, and I must confess I had always assumed that there were no circumstances under which a counterparty could accelerate on a credit default contract. But what's weird is that the Times could not persuade either the regulator or the monolines to acknowledge that this might be the case. Here's New York's regulator, Eric Dinallo, on the subject:

“It is a concern that possibly if one of the companies filed for rehabilitation or if we move to rehabilitate, the holders of the credit default swaps could move to get preferential treatment,” he said.

"Preferential treatment" is a long way from "all of their CDS comes due right away". Then we get closer to an acknowledgment from MBIA, although it's difficult to say whether they're being evasive and unwilling to discuss insolvency or suggesting that there's a very severe set of circumstances under which the CDS would come due.

The swaps’ acceleration clauses appear to be a factor in this bit of brinksmanship, although MBIA does not advertise their existence. In a presentation about its first-quarter results, for example, MBIA said its “insurance contracts are not subject to acceleration.”

Asked about this discrepancy, MBIA said the presentation language meant that holders of its swaps have no acceleration rights “as long as the company continues to operate in its current manner,” which it believes it will do.

“Fortunately, for us it’s not something that we have to be concerned about,” said Greg Diamond, director of investor relations for the company.

I'm a huge water-carrier for the monolines, and might be making too much of a slight gap in the Times' ability to get the terms of the CDS contracts on record. Or I might be getting to excited over a situation that is, for now, hypothetical. It's interesting, too, to see an article on the monolines that doesn't just approach it from the point of view of their ratings. But the article has a slightly peculiar aftertaste.

[UPDATE: It occurred to me as I was going to sleep - what if the Times had confused credit default swaps written against MBIA, all of which would definitely be accelerated in the event of an insolvency, and CDS written by MBIA, not all of which is distressed, and would only be called if the underlying credit defaulted?]

Monday, June 16, 2008

Moderately Epic Return To The Arena-Blogging Fray

Yes, there's a whole host of ructions surrounding the financing of stadium projects, and I haven't been around to pontificate. Well I've been busy growing a child-baby, so sue me.

I'll recap the news, very briefly, for you. Stadium projects, as supposed spurs to economic growth, and as occasionally useful bits of civic infrastructure (somewhere between subway stations and libraries, at least in terms of popularity), have often been able to get interest payments on their debt exempt from taxes, through mechanisms too complicated to explain in detail (it's called PILOT, and after hearing some responses to my last few posts on the subject of stadium finance, I've opted against doing so. Someone who can write about it, without making any eyes bleed, is Neil deMause. Go.)

But because they are some distance from being essential bits of civic infrastructure, it's been common for the Internal Revenue Service to keep an eye on how sports teams go about getting tax exemption. What's roiled the hapless Yankee Stadium project, the victim of the fact that Steinbrenner does not know one end of a cinder block from the other, is it bumping into one of the several restrictions that the IRS imposes on such for-profit borrower.

The Yankees want more money to complete their farcical orange-hued disneyland of a ballpark because their Nixon-funding, ship-building, somewhat detached owner doesn't know how to manage a construction project.

[Can I digress for a moment? I watched the entirety of the Mets double-header, listened to an awful amount of speculation about their manager Willie Randolph's job, and wanted to remark again on just how canny the Met's owners, the Wilpons, are. Randolph has been forced to do as well as he can with the old busted line-up inflicted on him by general manager Omar Minaya. Minaya has been awfully good at extending the Mets' appeal, making money from their very own cable channel, SNY and rebranding them as a more dynamic force in the city's baseball (they get a much better shake from the NY Times' sport section these days, for instance). Picking line-ups? Not so much. Randolph is a very unsuitable fall-guy, but then so is Minaya, so the Wilpons keep reminding Minaya that he's welcome to deal with Randolph as he sees fit, and are happy for the fans to think that the Wilpons have their interests at heart. But I'm not convinced they want anything to change, because that would involve flinging money at their farm system, among other financially unpalatable moves[UPDATE: God you're a jackass, Gringcorp. Wilie just got axed. He shouldn't have been]]

The Yankees' woes are important, because among the rules that were adopted since their financing closed are restrictions on total debt size and the relationship between debt service and the nominal tax payments on which (under the current rules) the debt service is said to be predicated. None of them would prevent Bruce Ratner's Nets arena financing happening, and none of them would prevent some kind of tax-exempt financing happening. What might prevent a tax-exempt deal from happening would be some drastic move from the IRS and its congressional overlords to end the practice altogether. Rep Kucinich's growling to the contrary, this looks unlikely.

I am a little disappointed, though, in the way nolandgrab's Lumi spun one of FCR's statements on the project. I think that it is theoretically possible to do a financing for the Nets arena without exempting its bonds from tax on their interest. My main justification for saying this is that the Jets/Giants managed to do it, though I'll grant you their franchises are much stronger than a relocated Nets. If though, I have missed a place where FCR has said that the project cannot go ahead without a tax exemption, I apologise copiously, Lumi.

In any case, if I have any overriding quibble, it's that we're still seeing the financing as this kind of binary, on/off-type creature. FCR is probably intermingling its returns from the various projects at the Vanderbilt Rail Yards site and its surroundings as much as it intermingles the PR. The opportunities for bits of the AY project to cross-subsidise each other, much as bits of a sports teams operations cross-subsidise each other, and bits of wealthy sports teams owners holdings subsidise each other, are legion. Changes to the ways that one component raises financing have subtle knock-on effects on FCR's profits rather than one catastrophic result.

Given that Oder's numbers show the arena project throwing off decent amounts of cash, even under some fairly conservative assumptions, these hikes in debt service costs mostly eat into FCR's returns on the project, or at least the returns of the Nets owners and the stadium's economic owners. With the AY office tower projects, if you don't get anchor tenants, you don;t go ahead. But with the arena, the fact there will be at least some people willing to go to a basketball game, and at least some corporations with a debased enough brand image to want to be associated with such a pastime (you can tell I'm a huuuuge basketball fan) provides you with that kind of cushion.

FCR and its investors have some kind of pain-point, a little like that global nuclear annihilation game in Never Say Never Again. We don't know what it is, and they will try not to give us any idea of where it is. The carrying costs of this portfolio of properties in a gentrifying part of Brooklyn is one factor, chipping away at their debt services subsidies is another. But their willingness to throw up their hands and saunter off in the direction of the real estate industry's equivalent of the blackjack table.

But let me repeat: the financing of Atlantic Yards does not have an on-off switch. Atlantic Yards does. And Ratner's hand is on it. He'll take it off as a result of a multitude of cuts, not just one.

Wednesday, June 04, 2008

Best. Excuse. For. Not. Posting. Ever

Apologies for the gap between posts. I was going to come back all insouciantly and post something deep about penitentiaries. But after a conversation with a wise semi-retired mp3 blogger I decided against it. I became a Dad some ten days ago, and the little chap is doing well, though he is rather time-consuming.

His name, should you care, and translated into fake blog style, is Federico Johan N. Corp. He was born in, er, Manhattan. For, er, medical reasons. The first name was indeed enough to get me a free PBR from Matt at Freddy's.

I plan on maintaining a posting volume somewhere between Dope On The Slope and Dooce, and to maintain a quality somewhere far below them. With better tunes.

The Make Up - "We're Having A Baby"
Buy "I Want Some" direct from the label. Spend what you save on A&D lotion

(Pic courtesy of Metal Babies. No, really)