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巴曙松教授,博士,国务院发展研究中心金融研究所副所长,研究员,博士生导师,享受国务院特殊津贴。    巴曙松教授在银行、证券、基金、企业年金等领域有过10余年的实践工作经验,熟悉商业银行风险管理、基金与年金运作,参与中银香港海外重组上市项目,主持起草了《中银香港风险管理政策与流程》。目前的主要研究领域为金融机构风险管理与金融市场监管、企业融资问题与货币政策决策,出版了国内第一本系统研究巴塞尔新资本协议的《巴塞尔新资本协议研究》(中国金融出版社2003年版)

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buddy, could you spare us $15 billion?  

2008-01-28 15:00:29|  分类: 信息汇总 |  标签: |举报 |字号 订阅

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Jan 24th 2008 | NEWYORK 
From The Economist print edition

Another shady realm of financegoes begging for a massive bail-out

 

THIS has been a crisis of risk inunexpected places. Think of collateralised-debt obligations (CDOs),structured investment vehicles (SIVs), and now a£4.9 billion ($7.1 billion) loss due to fraudat Société Générale. One particular nastiness has beenfestering in an obscure industry which, until recently, enjoyedpristine credit ratings: the “monoline” bond insurers. Theirplummeting fortunes (see chart) helped to spark the stockmarketsell-off that prompted the Federal Reserve to act this week aheadof its scheduled meeting.

So perturbing was their plightthat the prospect of a rescue caused a far bigger stockmarket rallythan the Fed's biggest rate cut in a quarter of a century the daybefore. There may be no better example of how a dull province offinance, when snared by complex risks it barely understands, canbecome terrifyingly unboring.

Though themselves no giants,monolines have guaranteed a whopping $2.4 trillion of outstandingdebt. The two largest,MBIA and Ambac, cut their teeth “wrapping” municipal bonds, ineffect, renting their AAA rating to the securities for a fee. For along time this business, though staid, was nicelyprofitable.

But, as competition grew, themonolines—with two honourable exceptions, FSA and AssuredGuaranty—were seduced by thehigher returns of structured finance, especially the stuffinvolving subprime mortgages (see table). As mortgage delinquenciesrose, so did paper losses. Ambac and MBIA wrote assets down by a combined $8.5 billion in the pastquarter.

The monolines' thin capital cushions, adequate when they wrote only safemunicipal business, now look worryingly threadbare. Moody's andStandard & Poor's—the very rating agencies the monolinesrelied so heavily upon when piling into the mortgage business—arethreatening downgrades unless they raise more equity. Ambac'sfailure to do so last week prompted Fitch, another rating agency,to cut its debt by two notches, to AA.

This has spooked investors forseveral reasons. First, heavily downgraded insurers would losetheir raison d'être and thusface the prospect of selling up or going into “run-off”: closingto new business and gradually winding down.

Worse, from a systemic point ofview, when a monoline is downgraded all of the paper it has insuredmust be downgraded too. Hence, after its move against Ambac, Fitchwent on to cut no fewer than 137,500 bonds (including one issued byArsenal football club).

This is more than academic:holders of downgraded bonds have to mark them down under “fairvalue” accounting rules. Some, such as pension funds, may holdonly the highest-grade securities, raising the prospect of forcedsales. And, with fewer top-notch insurers to turn to, bond issuers'costs would rise. The loss of the AAA badge would cost investorsand borrowers up to $200 billion, reckons Bloomberg, afinancial-information firm.

Banks that were active inasset-backed markets have multiple reasons to worry. Many not onlyused monolines to wrap their products but also bought protectionfrom them through credit-default swaps (CDS). One insurer, ACA, has already had problems paying out,prompting Merrill Lynch to write down its exposure to the firm by$1.9 billion. Meredith Whitney of Oppenheimer has calculated thatbanks may have to write off $10.1 billion of the paper they insuredwith ACA.

Because the CDS market is barely regulated, it is impossible to know how muchof this monoline “counterparty risk” banks are exposed to. Inmany ways, ACA was an outlier: with a rating that never rose abovesingle-A, it targeted inferior bond issuers (whom its boss oncedescribed as “the cream of the crap”). But downgrades could leaveothers struggling to pay out on policies too.

Monolines have a tiny percentageof the CDSbusiness, according to the Bank forInternational Settlements. But the market is so vast that thisstill amounts to $95 billion of protection, most of it sold tobanks. If Merrill Lynch is a guide, fully half of Wall Street'ssubprime and CDO hedges were bookedwith monolines, says Brad Hintz of Sanford Bernstein. As the riskof MBIA and Ambac defaulting has grown, he adds, so has the cost ofholding once valuable hedges with them.

Alifeline for the monolines

No wonder, then, that a group ofbanks is giving ear to a request from New York' s insuranceregulator, Eric Dinallo, who oversees some of the big monolines, todiscuss a possible rescue. In preliminary talks held on January23rd, Mr Dinallo reportedly asked the banks to stump up as much as$15 billion to help MBIA and Ambac preserve theirratings.

The regulator, who apparently hasthe blessing of federal officials, is talking to other potentialinvestors too, said to include Wilbur Ross, a vulture investor, andWarren Buffett's Berkshire Hathaway, which recently set up its ownbond insurer and has not ruled out buying part of a troubled rival.These veterans believe the business has a future, despite its woes.That is because they understand that, on the municipal side atleast, the market has always demanded a much higher spread than theactual cost of risk, points out CBM Group's André Cappon. Cleverguarantors can exploit this gap.

It remains unclear how anybail-out would be structured. One possibility is to create theequivalent of “bad banks”, ringfencing the monolines'tarnished CDOoperations to allow their municipalbusinesses to continue unencumbered, or be sold. This would alsoassuage fears that mishaps in securitisation might bring down thepublic-finance markets, says Janet Tavakoli, a consultant. Anotheridea would be to create a so-called “excess-of-loss pool” thatwould allow the monolines to reinsure their nastiest tailrisks.

Banks have reasons to pause beforetaking part. They have seen a Treasury-backed bail-out of SIVswither for lack of interest, and they are not exactly flush withcapital. But it may be a bet worth taking, however gingerly. Evenif $15 billion were needed, that is thought to be a lot less thantheir (undisclosed) total exposure to the monolines. A painfulcontribution now looks preferable to another agonising round ofwrite-downs later this year.

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