Frequent readers will recall that in the past, on several occasions, we expected that MBIA would rise due to two key catalysts: a massive short interest and the expectation that a BAC settlement would provide the company with much needed liquidity. That thesis played out earlier this year resulting in a stock price surge that also happened to be the company's 52 week high. However, now that we have moved away from the technicals and litigation catalysts, and looking purely at the fundamentals, it appears that MBIA has a new problem. One involving Zombies. These freshly-surfacing problems stem from a particular pair of Zombie CLO’s – Zombie-I and Zombie-II (along with Zombie-III, illiquid/black box middle-market CLO’s). While information is difficult to gather, we have heard that MBIA would be lucky to recover much more than $400 million from the underlying insured Zombie assets over the next three years, which would leave them with a nearly $600 million loss on their $1 billion of exposure which would materially and adversely impact the company's liquidity. And as it may take them a while to liquidate assets in a sure-to-be contentious intercreditor fight – their very own World War Z – MBIA may well have to part with the vast majority of the $1 billion in cash, before gathering some of the potential recovery.
In almost every asset class, volatility has made a phoenix-like return in the last few days/weeks and while equity markets tumbled Friday into month-end, the bigger context is still up, up, and away (and down and down for bonds). From disinflationary signals to emerging market outflows and from fixed income market developments to margin, leverage, and valuations, here is the 'you are here' map for the month ahead.
It's no shock that the Spanish housing market is horrible but hope has been, following the government's nationalization of various banks and creation of the 'bad bank' to soak up all the toxic crap those banks had on their books, that a recovery could blossom. It appears not - not at all. Not only are bad loans rising at record rates with house prices remaining down over 40% but now Reyal Urbis has filed for insolvency making it the nation's second largest bankruptcy as dozens of smaller firms have failed. What makes this so important is the fact that the banks were unwilling to refinance the debt - seemingly comfortable with liquidation - summed up perfectly: "Many loans were refinanced one or two years ago, in the hope that things would get better, but it has not been the case and there is now more realism about the situation. Why would you extend a new loan today?" A good question, one that Tepper's Appaloosa will be pondering as its EUR450mm loan looks in trouble.
Following our most recent discussion of David Tepper's apparently 'now' bearish bias to financials (based on his $400mm BWIC), it appears that his latest "balls to the wall" thesis is not playing out so well. The S&P 500 just touched the key 1491.50 'Tepper Balls'-Day highs... meanwhile VIX has jumped by the most this year from Friday's lows...
While we already presented, courtesy of Nanex, the modus operandi of the Knight berserker algo, there was one outstanding question. What was the bottom line. And no, not how much the loss on Knight's Income Statement would be as a result of this glimpse into what really happens in the market: we already knew that would be $440 million. The question is what is the notional amount of stock that this algo bought in the 45 minutes in which it was operational. We now know: $7 billion. Or $155 million per minute. Or $2.6 million per second. Or, assuming the algo impacted just 150 stocks as previously reported, it was buying on average $17,333 in each name every second. Or, assuming an average stock price of the universe of 150 stocks of $30/share, the Knight algo lifted the offer roughly 600 times each second. For 45 minutes straight! That's right - the market making algorithm of a designated market maker which is responsible for 10% of the order flow in the US stock market, entered a pre-programmed mode (because the computer was told to do whatever it did by someone, and not without reason) that saw it buy up $2.6 million worth of stock every second.
The last time the Fed tried to dump Maiden Lane 2 assets via a public auction in a BWIC manner, it nearly crashed the credit market. This time, the FRBNY, headed by one ex-Goldman Sachs alum Bill Dudley, has decided to go back to its shady, opaque ways, and transact in private, with no clear indication of the actual bidding process or transaction terms, and sell $6.2 billion in Maiden Lane 2 "assets" to, wait for it, Goldman Sachs, the same firm that would benefit in the first place if AIG's assets imploded (remember all those CDS it held on AIG which supposedly prevented it from losing money if AIG went bankrupt?). One wonders: does Goldman have a put option on the ML2 portfolio if the market experiences a sudden and totally impossible downtick some day? But all is well - we have assurance from the Fed that the sale happened in a "competitive process." Luckily, that takes care of any appearance of impropriety.
Fed Back To Its Secretive Ways, Sells $7 Billion In Maiden Lane Assets Directly To Credit Suisse Without Public AuctionSubmitted by Tyler Durden on 01/19/2012 13:03 -0500
Instead of opting for a publicly transparent BWIC in the disposition of its Maiden Lane II assets, the Fed has once again gone opaque - long a critique of the Fed's practices which have required repeated FOIAs in the past to get some clarity on its secret bailouts and transactions - and proceeded with a private sale, without any clarity on the deal terms, in which it sold $7 billion in face amount of Maiden Lane II assets direct to Credit Suisse. The alternative of course would be the same snarling of the MBS and broadly fixed income market that we saw in June of last year. In other words, the Fed looked at the options: transparency and risk of grinding credit demand to a halt, or doing what it does best, which is to transact in the shadows, and avoid capital markets risk. It opted for the latter. As to why the Fed decided to go ahead with a deal shrouded in secrecy? "The New York Fed decided to move forward with the transaction only after determining that the winning bid represented good value for the public." "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed. Because if there is one thing Bill Dudley and the Fed knows is gauging what is in the best interest of the public... and the callorie content of the iPad of course.
Another Quarter, Another Blatant Window Dressing By The Primary Dealer Banks To Make Their Balance Sheets Seem StrongSubmitted by Tyler Durden on 10/17/2011 20:56 -0500
When back in 2010, Lehman examiner Anton Valukas exposed the bankrupt bank's Repo 105 practices (which subsequently we learned were also partaken into by most other banks, although the trail ends there and nobody was prosecuted for it, let alone went to jail -after all, everyone was doing it, and everyone knew about it), many were shocked and appalled that such a blatant window dressing practice was allowed to continue quarter after quarter. Which is why we suppose nobody will be surprised to learn that glaringly "in your face" window dressing continues to this very day quarter in and quarter out by the same Primary Dealers who already leech billions in free Fed (i.e., taxpayer) money courtesy of a collusive BWIC/OWIC spread-to-market in the Fed's daily POMOs. The quote-unquote shocking chart below is one we have demonstrated on numerous occasions in the past: it shows total primary dealer assets on a weekly basis as reported publicly by the New York Fed. We have made it clear time and again, that this chart demonstrates nothing short of the end of quarter window dressing, when PDs convert their asset holdings into cash to make their Tier 1 Capital much more robust than it truly is. After all, none other than JPM and Citi were praising just how prepared for Basel III they are with their "sterling" capitalization ratios... which were only sterling courtesy of precisely the highlighted window dressing which occurs each and every quarter. We expect nothing less from Bank of America and Morgan Stanley when they report their own numbers in the coming days. We also expect the regulators to do absolutely nothing to prevent this blatant abuse of fiduciary duty which has no other purpose than to hide the true sad state of America's banking system.
Funds Offloading Duration In $50 Million Bond BWIC; Are Inflation Concerns Affecting Liquidity In Long-Maturity IG Bond Market?Submitted by Tyler Durden on 07/19/2010 13:22 -0500
In an odd development, today bond traders have been fielding calls to express an interest in a $50 million bond BWIC. Two observations: traditionally any recent BWICs percolating have usually involved loans, and typically in the form of much larger baskets. This one, however, is all bonds, consists of 17 names, the largest of which are UPS, DIAG, TGT, HARVRD and PEP, and even more interesting is that this is for the most part 2030 and longer-maturing paper. It appears some fund has decided to unwind a big portion of its duration exposure. Granted, the bonds are mostly IG, with the biggest coupon at 7.9%, but nonetheless, the fact that $50 million in HY can not be placed in the traditional bond pipeline speaks volumes about the lack of liquidity in the bond market, especially for longer-dated, and thus inflation sensitive paper. As for stocks, it is very obvious that any liquidity in equities has long gone, as stocks undergo 0.5% rallies in the span of seconds, on no news, just momentum-driven HFT block order frontrunning.
A new loan BWIC has been circling the market, this one for just over $280 million, as another small portfolio of loans needs to find a new owner. The biggest positions include Transdigm TL $5.3 million, Georgia-Pac TLB $5.1 million, Dean Foods TLB $5.1 million, Celanese TL $4.9 million and AMC Entertainment TL $4.9 million. We have yet to hear if the trader organizing this particular auction has reported in sick. All bids are due at 11:30 am today to your favorite loan salesman.
The funnest news of the day comes from LoanConnector, that follows up on the story of a previously scheduled $126 MM cash loan OWIC due today at 3pm, which was supposed to take place today. The reason for the cancellation: the trader running the auction is out sick. Of course, the dramatic market reversal has nothing to do with it.
New $100MM Loan BWIC lurking. $100 million of various Term Loan Bs (and other) about to be gobbled up by credit investors. The name of the liquidating fund is, as always, unknown. The largest names in the BWIC include Del Taco TL B at $6.5MM, Neiman Marcus TL at $6MM, Polymer Group Tranche 2 TL at $5.4MM, Burger King Tranche B-1 at $5.3MM and Chrysler 1st Lien at $3.8 MM. Rush to get your bids in - you have 3 minutes.
Following yesterday's modest rally in European credit, US opened tighter and rallied to the week's tightest levels on jobless headlines and the 'Job Summit'. Equities failed again at 1100 and helped by FHA comments, weak MBA apps data, and an outstanding effort on the deficit, slid gently lower. Credit wavered all but unch from Tuesday's close for much of the day (covering yesterday's small gains overseas) until a late day test of Tuesday's lows in stocks and 100bps in IG13. HY broke $93.75 and underperformed IG but the sell-off was orderly and volume only picked up as we edged lower.
PIMCO, AllianceBernstein Face Over Half A Billion In Calpers Redemptions; Weakness For High Yield Market ApproachingSubmitted by Tyler Durden on 11/12/2009 16:10 -0500
Not a good day for PIMCO as Calpers continues scapegoating for its deplorable performance, and today the California Pension manager decided to trim its exposure to PIMCO. In doing so, Calpers slammed the Newport Beach firm for being too risk averse (watch out Bill, you know what happened to John Mack for being too timid): "While PIMCO managed to return 35.06% [from January to September 2009], PIMCO's aversion to risk resulted in underperforming the benchmark return of 47.45% by 1,238 bp." The result: Calpers is pulling $100 million from PIMCO, however it is not firing the manager altogether and instead will consider "allocating more assets to PIMCO in the future when risk aversion is expected to produce alpha in the high yield market."
Spreads were notably firm today, with HY outperforming IG, as markets gapped tighter at the open, were unable to recover Friday's tights and leaked tighter all day following the risk-on dollar down trend 'trade-du-mois'. A day of little real news but a continued sell USD, buy anything USD-based saw stocks gapping up to almost 2009 highs on almost 2009 low volumes and we suspect credit's rallies were helped by fund unwinds after Friday's loan BWIC.IG has now traded within a 20bps range (115bps to 95bps) since 7/23 (on an adjusted basis) while equities have continued to move higher with 'buy-the-dips' working incessantly on lower and lower volumes.