The Inevitable Has Come To Pass and Those That Insured Guaranteed Blowups Are Being Blown Up – Finally!

Reggie Middleton's picture Submitted by Reggie Middleton on 11/01/2010 08:47 -0500

Alt-ABank of AmericaBear StearnsCountrywideFitchGMACInvestment GradeLehmanLehman BrothersMoral HazardRating AgenciesratingsRatings AgenciesRealityReggie MiddletonRegional BanksWachoviaWashington Mutual

Zerohedge had posted an article this morning that brought back memories of how lonely it can be to have a contrarian, dissenting opinion – Ambac Does Not Make November 1 Coupon Payment, To File Bankruptcy Within A Month If Unable To Raise Additional Capital . You see, I have alleged Ambac to be insolvent for 3 years now – seriously, Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billionn in Equity! This post was written in November of 2007. On November 1st, 2010 the chickens are now coming home to roost (again). Of course, the sell side never really agreed with me. After all, there are two sides to every trade (excerpted from the afore-linked article)…

Bank of America Top Picks (June 2007)  TickerRatingPriceTargetPrice as of 11/29/07Profit on the BofA Call% ProfitSCAB$23.60$37.00$6.69($16.91)-71.65%MBIB$60.33$85.00$30.04($30.29)-50.21%Least Favorites    NONE      You really can’t get rich listening to these guys. Hopefully, you can see where the use of their default data is a conservative approach (even a bit rosy), albeit tweaked ever so slightly for the sake of reality. As you may have ascertained, I do not put a lot of faith in sell side research. I have even less faith in the big three rating agencies research (although Fitch is trying to be taken seriously). Thus, even if they deem ABK and MBIA not in need of more capital, that is near meaningless in my book. These are the same companies that rated the insured portfolios AAA a year or two ago that are now taking up to 20%+ losses.

Of course, this may not be surprising to some, since the best performing sell side analyst during this time period (save yours truly, of course) only racked up 38% in accurate calls: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

We also have to contend with the moral hazard/bailout issue. If you read my earlier missive on MBIA, I detailed the rating agencies’ dilemma.

Six Degrees of Separation: Guess who Ambac insures!Bank of America issued a report on the monoline insurers on July 30th, 2007 that states that ABK’s RMBS exposure to troubled companies is limited to only 4 cos. with vintages primarily in the early years excluding two relatively well performing underwritings. Despite this, they failed to include in this caveat the consumer finance insureds:

Countrywide, which probably has one of the worst performing portfolios in the industry; GMAC, who has also suffered significant losses that GM has been forced to cover, hence hampering a clean sale of the company; Indymac, another company that is saddled with mortgage related losses that is on the insured’s list (Indymac and Countrywide have had their shares more than halved in the last few months. I was short these companies. CFC may go bankrupt); Lehman brothers has some losses to contend with as well, but I don’t know to what extent since I don’t follow it – I do know that they are the 2nd largest MBS house on the street, next to Bear Stearns; Greenpoint Mortgage Funding is defunct, wound down due to losses; Then we also have Citimortgage (SIV king whose own mortgage portfolio is a mess); Accredited Mortgage Loan (bankrupt or close to it); Wachovia (just reported a billion plus writedown on mortgage assets); Countrywide Revolving Equity Trust/Alt-A trust (need I say more about undocumented 2nd lien loans from this lender); Option One Mortgage Trust (nearly defunct due to mortgage losse); BofA, mulit-billion dollar mortgage asset writedown; and Newcastle – who I believe is either out of business or close to it. I stopped following it some time ago.These are the companies and exposure that I am familiar with, at first glance in the consumer finance portion of Ambac’s portfolio, without any research. Just imagine if I took a real hard look at the insureds.

Now, using some common damn sense, would you think that the company that is insuring these guys’ mortgage and finance products with 90x leverage may be having some problems that they may not be coming forward with. I have over 100 pages of proprietary analysis and calculations costing me weeks of analyst hours, that tell me Ambac may be out of business soon – but I really didn’t need to do all of that math and research if I just glanced at the bullet list above.

Now, as my longer term readers now, the list above was literally a who’s who of Reggie’s Short Parade…

The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?

The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | It appears that I should have dug deeper into Lehman! May 2008The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual

Despite what, in retrospect, appeared to be overwhelming evidence of insolvency, I received a lot of flack over the Ambac article. Well, all is well that ends well. For those who don’t believe the big banks are in a very similar position, I suspect you will be reading an article similar to this one on banking in a year or two.

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by SheepDog-One
on Mon, 11/01/2010 – 10:09

Collapse-o-rama, resume!

Login or register to post comments by Careless Whisper
on Mon, 11/01/2010 – 10:16

this is a perfect example of why it pays to do your homework and stick to your convictions — and don’t listen to the sell side, cnbc, talking heads, rating agencies, or anyone else with their own agenda.

reggie knows what it means to man-up.



Login or register to post comments by HitTheFan
on Mon, 11/01/2010 – 10:18

Go Reggie.

Login or register to post comments by RockyRacoon
on Mon, 11/01/2010 – 13:55

Yep!  What the koala said.

We furry sorts have to stick together.

Login or register to post comments by MeTarzanUjane
on Mon, 11/01/2010 – 10:35

Timing is everything unless you have a paper trade account like Reggie. Horseshoes and hand grenades.

Lumber surges as demand for plywood to board up bank owned property is on the increase.

Login or register to post comments by Reggie Middleton
on Mon, 11/01/2010 – 10:59

If you go through my archives, you will see that Ambac was one of the most profitable put trades that I ever made. Patience, risk/money management and conviction in your research will bear one through.

MBIA didn’t do so bad for one’s bear account either. Pull up the posts alongside a historical chart of long dated put options of the two companies…

Login or register to post comments by MeTarzanUjane
on Mon, 11/01/2010 – 11:11

Excellent! How’s that MAC trade working for you?

I was going to set up a paper trading account for my cousin’s kid. What do you suggest?

Login or register to post comments by Reggie Middleton
on Mon, 11/01/2010 – 11:34

Still working on it, smart ass. All in all, still quite profitable since I started the short in 2008 when they were more than cut in half, and the game isn’t over yet.

“What do you suggest”

I suggest you learn to face reality and stop trying to cherry pick what you think might support your lame argument and look at everything, you know the big picture. Maybe your nephew can help you out.

I have been right a whole lot more than I have been wrong thus far – knock on wood (I’d hate to jinx myself)…

Login or register to post comments by Chemba
on Mon, 11/01/2010 – 11:52

If your “sell side” research was really investable, then you would not be wasting it as sell side research, which is a low margin activity whose only purpose is in support of flow trading desks and investment banking clients, two businesses upon which “Boom Bust Blog is not able to capitalize.  Instead, you would be levering up your capital and making money on your self-proclaimed unique(ly) blinding insights.

I hate to be an ass, Reggie, but your act is really getting old.

Login or register to post comments by Reggie Middleton
on Mon, 11/01/2010 – 12:00

If you hate to be an Ass, then why are being an Ass? You have told me several times what you think I “should” be doing. I do as I please.

If you don’t believe the research is investable, all you need to do is go back during the last three years and mark the research to market, using realistic stops. It really is not much to argue about or discuss, and it really is just that simple.

Login or register to post comments by RockyRacoon
on Mon, 11/01/2010 – 13:57

Seems to me that passing on any article with your name at the top would save some folks a lot of heartburn.  So, why don’t they?

I, for one, appreciate your work, Reg.

Not being a trader that doesn’t mean much but it greatly expands my vicarious experiences.

Login or register to post comments by midtowng
on Mon, 11/01/2010 – 15:35

Reggie, you have an understanding of the markets that goes far beyond my abilities. I appreciate your time and work.

You should just ignore the people who are taunting you. They are just bitter people, and ZH has a lot of those, unfortunately.

Keep up the good work.

Login or register to post comments by Unlawful Justice
on Mon, 11/01/2010 – 15:30

2x I appreciate your research Reggie.

Login or register to post comments by stkboy
on Mon, 11/01/2010 – 13:25

You were way ahead of the curve with your analysis Reggie.

I remember reading about your analysis on MBIA and really didn’t pay sufficient attention at the time. Never thought it would crumble like it did but you were right and so many others were wrong. Your analysis of MBIA as well as subprime and banking etc has been spot on.

Keep up the good work.

Login or register to post comments by homersimpson
on Mon, 11/01/2010 – 13:43

Reggie – your work is appreciated. I’m pretty certain you won’t let two kids who cherry pick facts detract from your quality of work. Keep it up!

Login or register to post comments by kaiserhoff
on Mon, 11/01/2010 – 10:35

OK Reggie, plenty of us have been bears on real estate for a while.  So, what happens next?  Here’s my take.


1  AMBAC goes belly up

2  Insurance is gone on billions, probably trillions in bonds and derivatives

3 Rating agencies must downgrade

4 From 2 and 3 above – Institutions that can’t hold junk debt are forced into fire sales

5 Financial apocalypse


Or maybe one more bailout, but who wants to stand in front of that freight train?

It worked out so well for BofA;)

Login or register to post comments by jus_lite_reading
on Mon, 11/01/2010 – 10:44

Reggie, you’re a man after my own heart- I do remember reading that story on Ambac. I had Citi, JPM and BofA on credit watch since April. I firmly believe BofA will go down first, then JPM and Citi shortly after. I know what is keeping them propped for now, but a collapse is imminent. China holds the key to everything.


Login or register to post comments by ghostfaceinvestah
on Mon, 11/01/2010 – 10:59

Good call, Reggie.

Login or register to post comments by Panafrican Funk…
on Mon, 11/01/2010 – 10:59

Looks like they have about 31 billion in net par exposure on the consumer/rmbs stuff and about 45 billion in the public finance stuff.  I’m predicting a buyout in lieu of a workout or bankruptcy before December 1, this one will show that no firm with non-trivial CDS is too small to fail.

Login or register to post comments by Reggie Middleton
on Mon, 11/01/2010 – 11:10

Way back in November of 2007, my analysts and I looked at this company and we seriously couldn’t come up with a scenariou in which they COULD make it out whole! Seriously, it was a stretch to produce a realistic optimistic scenario in which there was any equity left unless we totally ignored what we saw (and what my experience and common sense) told me what was going on in the real estate and mortgage banking arena.

The only variable was time, and thankfully, the market significantly underpriced the longer term puts at that time. When things did hit the fan, you could have sat around and put a short postion on in the morning, closed it at night, and made between 30% and 150% per day, for several days in a row. Trailing stops weren’t even being hit because the stock dropped nearly straight down. I remember it clearly for my daughter was in the hospital and I was adding shorts to the puts in the hospital, demonstrating to the medical staff in real time how dangerous it was to trade off of sell side research from a fundamental perspective.

Login or register to post comments by Humpty Pundit
on Mon, 11/01/2010 – 11:02

Good work Reggie! Your no Jim Cramer!

Login or register to post comments by nazir2000
on Mon, 11/01/2010 – 11:20

good call reggie !

do u think a bailout is in works again for ambac considering the counter parties???

This balloon has so many holes ..i smell a black swan event

Login or register to post comments by NotApplicable
on Mon, 11/01/2010 – 11:32

Bankrupt? Psshaw! Why they’re TBTF, so “solvency” is merely a facade within a belief system. 😉

Let’s see, the biggest problem allegedly facing the Fed implementing QE2 is a lack of Treasurys to buy, so why wouldn’t they buy all of the toxic paper from the monolines?

After all, without them, there is no more muni market. Then again, since the IRS has the new “Bankrupt America Bonds,” they might be looking for a quick kill to the tax-free munis, which would then give them the mandate to start bailing out the states directly.

So… maybe Ben will kill off the monolines, or maybe he will zombify them?

Login or register to post comments by Dagny Taggart
on Mon, 11/01/2010 – 11:39

Reggie, you rock! Where does one go to find out who insures the other schemes, I mean primary dealers/banks? Or is that too located in a dark pool of nasty infinity that only the 33rd degree masons can see?

Login or register to post comments by covert
on Mon, 11/01/2010 – 11:41

what exactly is a collapse? what does that practically mean?


Login or register to post comments by title examiner
on Mon, 11/01/2010 – 11:41

Aren’t all of those banks MERS members?

Login or register to post comments by Zero Debt
on Mon, 11/01/2010 – 11:43

The chickens are coming home to roost… but the nest egg is gone.


Login or register to post comments by beastie
on Mon, 11/01/2010 – 12:00


Nice calls. I know you don’t like to speculate on what may happen but do you forsee the banks gobbling up these pieces of junk insurance companies? The banks already have the circular firing squad lined up via hedging with each other so I don’t see them having a problem adding these companies at pennies on the dollar to their portfolios. 

Login or register to post comments by Reggie Middleton
on Mon, 11/01/2010 – 12:03

I haven’t looked at them since I closed my positions out some time ago, but as percieve them they are 6 parts liability to 2 parts assets. To acquire them will be to acquire a sinkhole.

Login or register to post comments by Eternal Student
on Mon, 11/01/2010 – 12:19

“I suspect you will be reading an article similar to this one on banking in a year or two.”

Nice article. But this statement strikes me as a tad optimistic. I was thinking 6-12 months. But you have far more expertise than I ever will in this field, and I’m glad you think there’s that much time.

Login or register to post comments by SamuelMaverick
on Mon, 11/01/2010 – 12:22

Reggie rocks !!!  The only problem with knowing what you know is how to turn it into actionable investment plays at the correct time. You saw this clear as day in 2007, and Ambac was able to kick the can down the road for THREE YEARS!   Thank you Reggie.  Yours, Maverick

Login or register to post comments by beastie
on Mon, 11/01/2010 – 12:26

Thx Reggie,

Agreed they are sinkholes but they are necessary and the void of their complete loss would need to be filled. 

They are insolvent as are the banks but it’s a mutually assured destruction thing with those clowns. My opinion it’s not a first to the exits with the banks. There is no exit except inflate all assets. 


Login or register to post comments by Reggie Middleton
on Mon, 11/01/2010 – 12:59

This is the fundamental argument behind the original short thesis, which was quite profitable. You see, the monolines business model was basically get something for nothing. The mere concept of a smallish company with a couple of billion dollars of equity somehow insuring thoousands of much larger entities, totalling literally close to or over a trillion dollars of aggregate nominal risk, enabling said entities to rate said risks AAA because this smallish company carried a AAA rating simply doesn’t make arithmentical sense.

You cannot add to 2 + 5 and get 11 as a sum. In order for the monoline industry to work, the companies need to be much larger, with many more higher grade assets while at the same time charging a lot more for their protection (ex. Buffet’s Berkshire Hathaway methodology). This effectively destroys what was thought to be the monoline business model of the past for many munipalities and corporate insureds would opt to go without or work something else out.

You cannot just throw these little companies with a few billion in equity a few basis points and turn your hundreds of billions of dollars of trash into spun gold and gaggle beautiful women (or men, contingent upon your preference, but you get the message) begging you for an orgy. It just doesn’t work that way in reality. I know finance in the US hasn’t reflected reality for a while, but at the end of the day, reality rules the day – all day everyday.

Login or register to post comments by ghostfaceinvestah
on Mon, 11/01/2010 – 13:27

The monolines are not necessary at all, where do you get that idea?

They exploited rating agency arbitrage, that is all.  Munis were underrated and the insurers themselves were overrated (on a relative basis).  The recent bust has exposed that rating agency fraud.

Login or register to post comments by Waterfallsparkles
on Mon, 11/01/2010 – 12:50


Don’t you think it a bit odd that they try and blow up ABK right before the Mortgage Buy Back?  They would be huge beneficiarys.

Login or register to post comments by moneymutt
on Mon, 11/01/2010 – 13:31

Whenever someone says monoline insurers, I visualize the flat line on an EKG…that’s a monoline.

If I took $25,000 in a savings, hung up my shingle and sold homeowners insurance to a handful of people that each owned $150k house, I would be put in jail by some state insurance regulator. Me taking the premiums would be taking money for nothing, because if there was any really big claim, I would just default. And if any of those homeowners knew the true state of my finances they would never buy insurance from me.

They might buy from someone you had a similar percentage of reserves, simply because total losses on houses rare, if it was spread around enough that the few total losses that happen, there would be money to pay. Still, given that huge hail storms or hurricaines can happen, even big homeowner insurerers need re-insurance for really big hits.

So if the banks are analgous to knowledgeable homewoners, and they know the monoline insurers’ paltry reserves and small scale and yet banks still “insure” their financial products by paying small premiums for nothing to monolines, aren’t they just lying about risk. They know there is essentially no insurance. The banks pay for cover for their fraud, that has some pretty low cost of goods. They know almost any claims will wipe out the monolines.

The banks know, the banks lie.

Login or register to post comments by anonnn
on Mon, 11/01/2010 – 14:40

Thanks RM for sharing great work.

from Charles Dickens “Little Dorrit”:

A person who can’t pay gets another person who can’t pay to guarantee that he can pay. Like a person with two wooden legs getting another person with two wooden legs to guarantee that he has got two natural legs. It don’t make either of them able to do a walking-match. 

 [any color is a format error]

Login or register to post comments by JLee2027
on Mon, 11/01/2010 – 15:05

I can’t imagine this will take another year or two for the big bastards to fall. 

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