Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2?

Reggie Middleton's picture

Card Monte is a scam designed to separate a fool from his/her money. It
is quite efficient, particularly when fools are involved!

The Boogie Down Bronx

The big secret to the Morgan Monte Scam is that it is 10% sleight of
hand and 90% teamwork. Even if you are not deft enough to capture the
sleight of hand, the key in avoiding it is to recognize the team
players, whose key player is often YOU – The Mark!

The retail/typical qualified fund investor = “The Mark”

Monolines/FIRE sector= The Operator/Hustler!

Sell Side analysts = “Jess”

Rating agencies = “Paul”

How its done in the UK

Reenactment of 2009’s entire year of Wall Street earnings

How its done on Wall Street, see outset…

Next, up we let the late Biggie school you on how Wall Street banks follow the Ten Crack Commandments!

Back in my teenage days, before Big Corporation America bought up
most of 42nd street in NYC, you would regularly find tourists, young
boys out in their first trip away from their suburban home on their own,
and just plain fools getting separated from their money in a wholesale
fashion by the Three Card Monte street hustlers. You see, with 1 part
sleight of hand, and 9 parts deceptive teamwork (from a gang) that
parlayed an individual’s greed to override that part of the brain that
controls common sense, these Street hustlers actually had a steady
stream of suckers to rob.

Forty Deuce, as the brothers so affectionately referred to it, was a
very different place back then – drugs, prostitution, and street
hustling were the activities du jour. Actually, not so different from
The Street today. Let me present you with a blatant example of The Old
Three Card Monte hustle being played on Wall Street today, along with
the team of the Fed, Washington regulators, and the ratings agencies.
From Bloomberg:

Ambac Financial Group Files Bankruptcy to Restructure Bond Debt

Nov. 9 (Bloomberg) — Ambac Financial Group Inc.,
a holding company for the bond insurer being restructured by state
regulators in Wisconsin, filed for bankruptcy with liabilities of $1.68
billion as of June 30 on an unconsolidated basis.

Ambac Financial, which filed its petition for Chapter 11 protection
yesterday in U.S. Bankruptcy Court in Manhattan, seeks to reschedule
payments on more than $1 billion in bonds and other claims. Ambac
Financial said this month it was trying to negotiate terms of a
bankruptcy court restructuring with senior lenders.

Ambac Financial
is the holding company of Ambac Assurance Corp., which has about $57.6
billion in policies insuring credit derivatives and other financial
products that are being restructured by Wisconsin regulators, according
to the company.

For those who have not been following me since 2007, I made very
clear that Ambac was HIGHLY insolvent, and basically the walking dead –
to wit: 

  1. Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billionn in Equity
  2. Follow up to the Ambac Analysis
  3. Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility

These posts were written in November of 2007 through the
end of that year. I assert, with absolutely no shame nor ambiguity
whatsoever, that monoline insurers such as Ambac and MBIA, as well as
other financial institutions (as in many banks) that allege that they
can write massive amounts (relative to their equity capital) of
leveraged instruments on bubbled assets at the top of the asset bubble,
yet remain solvent as that bubble bursts and asset values tumble 40% or
more – are essentially scams. The losses are so great in these
companies, that the three largest that were essentially taken over by
the government have absorbed nearly half a trillion dollars in
government aid. That’s right, I said government aid, not losses! Just
think about it. And the losses keep coming…

Freddie Mac Posts $4.1 Billion Loss in Quarter:
Freddie Mac, pickled by way over a hundred billion in losses and still
counting, literally has to borrow money from the tax payer to make the
dividend payments on the money that it borrowed from the tax payer!
The accountants say the losses are getting smaller, economic reality
and Reggie Middleton say the larger losses lie ahead. See our Shadow
Inventory worksheet for professional and institutional subscribers for
proof – File Icon Shadow Inventory. Having to borrow money to pay the interest on the money that you borrowed is essentially the writing on the wall, isn’t it?

I also assert that these scams cannot be pulled off in a vacuum. They need fellow scamsters, as as well as willing suckers, victims,
investors on which to perpetrate said scams.  So, in this particular
scenarios (and I have many, the monoline scenario is being used because
it is in the news today), the monoline insurer is the (Wall) Street
Hustler, who sold bogus protection (in the guise of insurance that
wasn’t under the reserve policy auspices of state insurance departments)
to banks. Were the banks the suckers? In no way were they the mark!
They were in on it. They needed these fake policies to move toxic trash
off of the balance sheet, or at the very least to free up reserve
capital. How did they do it? Well, they called in another member of the
scamster squad, the ratings agencies, who have a very loyal following of
passive, sheep, suckers, marks, investors. Here’s how it went down…

Excerpted from A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007). Here’s the story in a graphical nutshell… (click to enlarge)

and then…

So, you see, the scam couldn’t have went down without the major
players in place. The following is a rundown of the gang and their mark…

The (Wall)Street Hustler: the monolines, ex. Ambac and MBIA, who were plainly insolvent the day I first looked into them

  1. Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billionn in Equity
  2. Follow up to the Ambac Analysis
  3. Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility
  4. A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton

The Mark: institutional and retail investors who don’t subscribe to BoomBustBlog! :lol:

From the December 11, 2007:

Bond insurer MBIA Inc. got the
capital it sorely needed for Christmas, but paid a handsome price. It
also filled investors’ stockings with a new lump of coal: a
fourth-quarter profit warning.

Private-equity firm Warburg Pincus
LLC agreed to commit as much as $1 billion to MBIA to help boost the
financial guarantor’s capital level and potentially head off a
downgrade of its triple-A credit rating.

In addition to acquiring shares of
MBIA at $31 a share, Warburg receives warrants that will allow it to
buy an additional 16.1 million common shares of MBIA at $40 a share in
the …

The accomplice in disguise who urges the mark (the investor) to put his money in.

In the video above (this is how it’s done in the UK), this accomplice
is called “Jess”. I’ll call it Wall Street’s sell side analysts and the
ratings agencies – to wit:

Bank of America Top Picks (June 2007)

Ticker Rating Price Target Price as of 11/29/07 Profit on the BofA Call % Profit
SCA B $23.60 $37.00 $6.69 ($16.91) -71.65%
MBI B $60.33 $85.00 $30.04 ($30.29) -50.21%
Least Favorites        

And then you the other hustler’s accomplice, detailed in the graphics above – the rating agencies:

Okay folks, now its official! According
to Moody’s, you can now rest asured that your retirement portfolio
insured by Ambac is just as safe as those insured by Berkshire
Hathaway, et. al., – AAA safe! Moody’s has spoken…

“Moody’s gave a tentative pass to the biggest bond insurer, MBIA
Inc., by affirming its rating late Friday but changing the outlook to
“negative,” in a move sure to cause howls from bearish investors and
sighs of relief from Wall Street. Moody’s also affirmed the triple-A
rating of Ambac Financial Group Inc., another major bond insurer.

Moody’s update of its view of the
bond insurers had been awaited because of concern about the impact of
troubles in the mortgage market on securities that bond insurers cover.
Bond insurers guarantee the principal and interest payments on more
than $2 trillion in debt, including securities that are backed up by

Both MBIA and Ambac are top-rated
insurers, and both have announced moves this month to boost their
capital, which could help protect those ratings. This month, a private
equity firm agreed to provide up to $1 billion to MBIA, which said at
the time that it was also considering additional capital options. And
Ambac struck a deal under which it bought reinsurance for a $29 billion


MBIA takes nearly a billion dollars in value losses on its portfolio in one
month, gets a 500 million dollar equity investment below current market
price, and an offer for another $500 million through a discounted
right’s offering, which brings it back to where it was before it lost
the $1 billion last month (which was in trouble) and it gets its AAA
rating confirmed??? Ambac buys reinsurance from a company in the same
business as Ambac taking very similar losses, and it gets to retain its
AAA rating??? Doesn’t anyone see concentration risk and an
uncomfortable amount of correlation here, or is it just me?

And then you have the joke with the punchline known as Moody’s rating’s opinion – all too funny, LMAO :-) as long as you didn’t follow their advice. See  Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility:

From Bloomberg news:

MBIA Inc. fell the most in more than
20 years in New York trading after Moody’s Investors Service said the
biggest bond insurer is “somewhat likely’‘ to face a shortage of capital that threatens its AAA credit rating.

A review of MBIA and six other AAA
rated guarantors will be completed within two weeks, Moody’s said in a
statement today. Moody’s revised its assessment from last month that
MBIA was unlikely to need more capital after additional scrutiny of
the Armonk, New York-based bond insurer’s mortgage-backed securities

“The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated, (about a week and a half ago – my, aren’t we fickle with our opinions) New York-based Moody’s said. “We now consider this somewhat likely.”

SOMEWHAT LIKELY!!! This is the adviser that gave MBIA a AAA rating,
the same rating that they give to the US Treasury Note! An they say the
company is “somewhat likely” to experience a capital shortfall!

From Standard & Poors:

Standard & Poor’s Ratings
Services today lowered its ratings to ‘D’ on the senior swap and the
class A, B-1, B-2, C, D, and E notes issued by Adams Square Funding I
Ltd. The downgrades follow notice from the trustee that the portfolio
collateral has been liquidated and the credit default swaps for the
transaction terminated.

The issuance amount of the downgraded collateralized debt obligation (CDO) notes is $487.25 million.

According to the notice from the
trustee, the sale proceeds from the liquidation of the cash assets,
along with the proceeds in the collateral principal collection
account, super-senior reserve account,
credit default swap (CDS) reserve account, and other sources, were
not adequate to cover the required termination payments to the CDS
counterparty. As a result, the CDO had to draw the balance from the super-senior swap counterparty. Based on the notice we received,
the trustee anticipates that proceeds will not be sufficient to cover
the funded portion of the super-senior swap in full and that no
proceeds will be available for distribution
to the class A, B, C, D, or E notes.

Note, that the super senior stuff was supposed to be the super safe,
overcollateralized stuff that allegedly justified the AAA rating for the

Today’s rating actions reflect the
impact of the liquidation of the collateral at depressed prices.
Therefore, these rating actions are more severe than would be justified
had liquidation not been ordered, in which case our rating actions
would have been based on the credit deterioration of the underlying

The collateral (home prices) that backed much of the debt that was
financially engineered in question, are now much, much lower in price
than they were in 2007! The only prices that may have stabilized some
were the prices of the assets bubbled up by the Fed using taxpayer money
in an attempt to reblow the bubble. What do you think happens when the
Fed stops blowing bubbles with the taxpayers’ last breath? Well, we
won’t find out this week will we, since QE 2.1 has just commenced??!!

Across the cash flow assets sold
and credit default swaps terminated, we estimate, based on the values
reported by the trustee, that the collateral in Adams Square Funding I
Ltd. yielded, on average, the equivalent of a market value of less
than 25% of par value.

Mind you, Ambac’s insured portfolio is
32% of this stuff. Are there anymore debates to be had regarding 50%
or more recovery values?

Last quarter, Ambac increased its
structured product loss reserve by about $75 million. Would that even
be enough to cover the one loss above??? They have $29 billion
of CDO exposure backed heavily by Subprime RMBS and ABS CDO Mezzanine
that is more than likely to – no, let’s make that, definitely result
in significantly higher losses for the company. Remember, I feel that
public finance will not be the cash cow it use to be and may even
develop notable losses due to the bidding up of budgets on bubble
revenue that is no longer available.

And what’s up with S&P??? Their ratings go from AAA to D in one downgrade!!!
You buy AAA rated paper, rated the same as paper with the full faith
and backing of the richest government in the world, then suddenly you
are told you won’t get your money back! I might as well jump on
Moody’s ass as well. They change their tune on MBIA and the monolines
(sounds like a music group akin to the Monkeys, or the Beetles) every
other week. Everybody makes mistakes, especially me. But this is not a
mistake. This stuff was not hard to see coming. Hell, all you had to
do was read this blog. I query… Why, oh why, are investors heeding the
reports of the ratings agencies? How many times must you get hit in
the face before you put your hands up? I am not one for litigation
(actually I hate and despise it, to put it lightly), but this stuff
really, really begs the question.

The CDO story links into the article about from the good doctor
and leads into my next set of concentrated shorts as well. I am
looking into overpaying with stupidly low cap rates (commercial real
estate gurus) and guys who have mounds of credit risk exposure to other
guys who couldn’t pay up if their lives depended on it. I will
release the research to the free portion of the blog once I get my
shorts in order – roughly a week or two.

BTW, I was referring to GGP in that statement –’s answer to GGP’s latest press release and Another GGP update coming…. They filed bankruptcy last year!

Oh, I think I left out one of those major rating’s agencies. Oh well,
just to be fair, let’s cover all of the bases. Next up we have an
archived article from Mish Shedlock’s blog:  Fitch Discloses Its Fatally Flawed Rating Model

In a conference call regarding
securitization and the sub-prime mortgage market crisis, Fitch responded
to First Pacific Advisors like this:

Q: What are the key drivers of your rating model?
Fitch: FICO scores and home price appreciation (HPA) of low single
digit (LSD) or mid single digit (MSD), as HPA has been for the past 50

Q: What if HPA was flat for an extended period of time?
Fitch: They responded that their model would start to break down.

Q: What if HPA were to decline 1% to 2% for an extended period of time?
Fitch: They responded that their models would break down completely.

Q: With 2% depreciation, how far up the rating’s scale would it harm?
Fitch: They responded that it might go as high as the AA or AAA tranches.

Hmmmm! A 2% housing price decline could cause loses to reach the AA or AAA tranches, eh??? I wonder what these losses will do?

The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression

Tuesday, October 5th, 2010

Subscribers have access to all of the data and analysis used to
create these charts, in addition to a more granular application, by
state in the SCAP template and by region in housing price and charge
off templates – see

I will be attempting to quantify the risks to the other parts of the
bubbled up financial ecosystem borne from Ambac’s tardy, yet truly
unavoidable bankruptcy filing and will report my findings, if any of
substance, to my subscribers. Next up is a truly realistic look at the shadow housing inventory and why these mortgage related problems (ex. like the one above) are far, far from over. Click here to subscribe!

Related reading: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Friday, October 15th, 2010

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Il Duce's picture

I'm pretty sure I saw Reggie in one of those "Monty" videos.

Fíréan's picture

"Someone" always pops in to re-direct the discussion and focus of attention from the comdemnation of the guilt of the perpetrator to the defense of the victim by implying guilt ( your fault for getting robbed, defend that). Clever tactic for changing the focus of attention and yet an old and worn out one that the most don't buy anymore. Just like regular scams structured into our society the general public are becoming increasingly more savy to it all.And the readership here.

jus_lite_reading's picture

Reggie- Ambac is one cog in the gear ring.

GS is the ring itself.

JPM is 19-20 cogs.

BofA is 7-8 cogs.

WFC is 5-6 cogs.

Deutsche Bank is 5-6 cogs.

Socitie Generale is 4-5 cogs.

Right on down to the bond insurers which each represent 1-2 cogs, with Ambac ebing just one. Oh, the gears are shredding. Wait until Next week when the fireworks really begin as China calls the bluff of the US and shouts to the world that the US/UK/EU have been tricking them the whole time...

The catalyst will be the defaulting of one or more periphery nations of the EU, most likely Greece or Ireland. Germany has unofficially said "NO MORE!" to Greece and the PIIGS.

HumanRights's picture

Criminals ALWAYS blame their victims. Right David?


BTW, love your work Reggie

JW n FL's picture

Living a lie is living a lie... participating in a lie is participating in a lie...


Ignorance of the law, is no defense?


Don't believe the Hype?


But other than that Reggie... you are fantastic, keep preaching the facts Brother!



DavidRicardo's picture

Reggie, I don't know if you are just stupid or are a genuine reactionary.  In any event, your petit bourgeois notion of a "mark" is utterly ridiculous.  Were those who invested with Madoff marks or co-conspirators.


I'll choose co-conspirators.  Somehow there are the blessedly innocent in a Ponzi scheme.  No Reggie, you're just going to have to swallow hard and repeat after me:


Vampyroteuthis infernalis's picture

So you are saying someone who is naive is not innocent? Naive = guilty?

DavidRicardo's picture

Show me who, in FACT, was naive.  No one, no matter how naive, could reasonably rely on the representations made when the returns were as good as they were.  If it seems too good to be true, it is too good to be true, and you held to have realized.


"Naive"--don't make me laugh.  Prove they were naive. 


Ha ha!  You'll find out that they are just as guilty as Madoff.



Fabio's picture

Hi from Germany,

maybe I have an example:

In Europe there was a UCITS3-"Madoff-Feeder"-Fund called "Herald". The prospectus did not mention Madoff and did not mention the fact, that the custodian bank (HSBC Lux) had delegated the custody to BMIS via a secret sub-custodian aggreement that had not even been filed to the CSSF (kind of SEC from Luxemburg) and brokerage was delegated to BMIS as well. Investors were led to believe they were investing in a kind of long-short us-equity-fund with no overnight risk (basically us-treasuries over night).

We are not talking about some Cayman-Island-Offshore-Managed Account. It was UCITS3.

The case is in courtrooms in Luxemburg right now.



DavidRicardo's picture

 "Investors were led to believe they were investing in a kind of long-short us-equity-fund with no overnight risk (basically us-treasuries over night)."


Baloney.  With what kind of returns?  And let's find out WHO was actually led to believe WHAT.


I don't believe this little Pollyanna story of yours for a minute.  Indeed, you are ASSUMING they "were led to believe"--that is, assuming they are innocent--before knowing whether in FACT they were knowing participants in a Ponzi scheme.


Hope the lawsuit finds THAT out.

Skullbiscuit's picture

Ridiculous!  You're assumption is that everyone in the market has perfect access to all information and is equally able to judge risk.  You sound like an Economist who cannot separate himself from classical economic theories.

The bottom line is that modern capital markets require intermediaries which act as "honest brokers" who have access to both information and understanding in which to deliver judgements on what are essentially opaque instruments or products.

That is purportedly what the rating agencies were supposed to be doing.  If no one believes what they are doing is "honest" and likewise everyone believes everyone is deceiving everyone else with a hidden agenda --- then guess what?  It is the end of capital markets and the end of the economy.

Really, get real.  At some level you are paying someone to do due diligence and tell the truth.  If your assumption of outsized returns = corruption and everyone comes to believe that; then trust is finished and it is the end of economy.

DavidRicardo's picture

No, it is YOU who are assuming "everyone" and "perfect."


Instead, let's ACTUALLY FIND OUT who knew what.  Let's see if  someone at the Church deciding whose advice to accept, actually--surprise!--went to college with that investment guy that the Church just happened--surprise!--to advise them.

You are a complete clown.  Listen to what this idiot says:


"If no one believes what they are doing is "honest" and likewise everyone believes everyone is deceiving everyone else with a hidden agenda --- then guess what?  It is the end of capital markets and the end of the economy."


Hey clown, let's FIND OUT if the people involved knew the facts.  Let's take some depositions, eh clown?  That won't result in "the end of capital markets and the end of the economy," but it WILL allow the Church to recover money from those who defrauded it, AND LET'S FIND OUT WHO THOSE PEOPLE WERE.


You're a jerk.


Jim in MN's picture

I don't know exactly what you are either, but explain this:  The main investment fund of the Presbyterian Church was stuffed full of toxic waste MBS with awesome credit ratings by Evergreen, a Wachovia sub since taken over by Wells Fargo.  The bond fund (!!!) of the entire Presbyterian Church USA and any congregations that invested in it lost over 20% just from that scam. 

Have you checked your loved ones' investment funds>>>this is in your lap.

Now who is the co-conspirator?  The church?  The people in the pews? 

Your cartoon of a Ponzi scheme cannot encompass the enormity of the crimes we are witness to. 

DavidRicardo's picture

Don't be UTTERLY ridiculous.  If it looks too good to be true, it IS too good to be true.  Bet the Church was happy as long as the money was flowing, wasn't it?  Bet they couldn't believe the returns they were getting.  Fantastic, weren't they?  Yeah, TOO fantastic.


So the Church happily sucked up the money.  NO facts justified the rating these securities got.  NO reasonable person would rely on those ratings, where they were a professional or not.  Don't make me laugh.  The Church knew perfectly well it was part of a Ponzi scheme, just as Madoff's investors knew perfectly well they were a part of a Ponzi scheme.


Nor could the Church rely on its lying investment advisors, although those advisors ALSO knew it was a Ponzi scheme.  Don't tell me the Church innocently relied on advice.  Why not?  BECAUSE THE RETURNS WERE TOO GOOD.  No reasonable person--professional or not--could have relied on those returns and representations.


The Church better look again at the documents it signed in order to see what FACTUAL representations it made.  Let's see the "innocent" investor, the Church, become the DEFENDANT in some of these suits.


Shocking, isn't it? 




ATG's picture

Reggie rocks while others spew

Larry Summers cost Harvard billions with debt derivatives before he was fired as President

Somehow the 0 Team missed all this during vetting him as 0 adviser, or just plain did not care, perhaps thinking his Nobel Laureate uncle would come thorough with that Nobel Peace Prize for a manchurian candidate who sealed his records

Who knows except those ruined by Fed IRS Red Tape corporate government monopolies?

Anal Picnic's picture

Reggie: This white girl thinks you rock!