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Of Guarantees and Printing Presses

by: Michael Shedlock October 13, 2008 | about stocks: ABK / MBI    
Michael Shedlock

Michael Shedlock

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Yesterday in Fannie, Freddie Commit to Waste $40 Billion a Month Taxpayer Money I talked about the chain reaction of guarantees.

Ireland guaranteed bank deposits putting Germany and the UK at a disadvantage. After criticizing Ireland, Germany did the same. The UK stepped in to guarantee bonds so now Germany and the US are at a competitive disadvantage.

Am I the only one who sees how absurd his is? Is the final ending point, the government of every nation guaranteeing everything?

Australia and New Zealand, get into the Guarantee Business

Australian Prime Minister Kevin Rudd said Sunday the government will guarantee all bank deposits for a period of three years.

From Sunday, the government will also guarantee all term wholesale funding by Australian banks operating in international credit markets "to make sure they have the best possible access to global capital," Mr. Rudd said.

The New Zealand government followed Mr. Rudd's announcement by introducing a bank deposit guarantee program as both countries sought safeguards against turbulence in global credit markets.

Bloomberg is reporting European Leaders Seek 'One Voice' to Counter Crisis.

"I want Europe to speak with one voice for Europe and for the world because this is a global crisis," French President Nicolas Sarkozy told reporters as he greeted European Commission President Jose Manuel Barroso at the Elysee Palace in Paris. Sarkozy said he's seeking "an ambitious, coordinated plan."

German Chancellor Angela Merkel, whose government earlier this month rejected French suggestions to form a joint bank- rescue fund, said yesterday the euro region will implement "the same toolbox of instruments." Merkel, Sarkozy and their counterparts in the 15-nation euro region are being forced to shift stance as a deepening slide in financial markets has threatened to tip Europe into a prolonged recession.

The 15 euro countries may agree to guarantee interbank loans of as long as five years to break the credit-market freeze, according to a draft statement cited by Agence France- Presse.

Luxembourg's Jean-Claude Juncker, who heads the Eurogroup of euro-region finance ministers, said in a statement today that "no financial institution of systemic importance" can be allowed to fail.

Brown's government has also proposed guaranteeing loans between banks to thaw money markets. The G-7 refrained from endorsing the approach two days ago. The U.K. leader may renew his push today. The U.K. plans to recapitalize its biggest banks including Royal Bank of Scotland Group Plc and provide 250 billion pounds of bank loan guarantees.

YahooFinance has a Draft summit statement says euro nations would guarantee bank debt.

Countries that use the euro will temporarily guarantee future bank debt to encourage lending and ease the credit crunch, according to a draft statement under discussion by European leaders Sunday.

The declaration says the governments would guarantee "for an interim period and on appropriate commercial terms" new debt issued by banks for up to five years.

"This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009," it says.

The leaders of the 15 euro-zone nations held an emergency summit Sunday night in Paris to seek European solutions to the financial crisis engulfing markets worldwide. The meltdown dominated summits around the world this weekend.

The statement also says that one way governments could save banks would include buying big stakes.

British Prime Minister Gordon Brown, who met with France's President Nicolas Sarkozy before the euro summit, said the plan "would involve not only more cash in the financial market but also a recapitalization of our banking system.

"And allied to that -- something that I believe is absolutely crucial -- to begin again the funding of businesses and mortgages with a guarantee given by governments. That can happen and will happen in the next few months," he told reporters.

Notice the discrepancy between the length of guarantees and the scrutiny over them. Also note that the UK has upped the guarantee ante to include mortgages. Wonderful.

Notice how the length and scope of the guarantees is creeping up. It started with 1-2 years, went to 3 years, and now the EU is proposing guarantees for up to 5 years and that "no financial institution of systemic importance" can be allowed to fail.

Hells bells, why pussyfoot around with this stuff? Let's just have every country guarantee everything forever. And if it comes to that (which it rapidly seems to be doing), one must stop and think about the value of those guarantees.

Let's step back for a moment and consider the share price of Ambac (ABK), a company in the guarantee business.

Ambac Monthly Chart

click on chart to enlarge

Ambac (ABK) is in the guarantee business. It kept guaranteeing more and more and more stuff and profits soared. All it took to collapse Ambak was sinking asset prices.

One quick look at the above chart shows that the market now thinks Ambac's guarantee is worthless. There are a number of other guarantee companies whose guarantee is equally worthless, most notably MBIA (MBI).

It is a waste of money buying guarantees from companies that offer a snowball's chance in hell of honoring those guarantees when times are bad. In good times guarantees are not needed, in bad times the claims cannot be paid.

Of course governments have something that insurers don't. That something is a printing press. However, there is theory and there is practice. There is a price to pay for those government guarantees. We have already seen the complete collapse of Iceland's currency.

Blanket guarantees of everything will eventually end in a collapse of some major country or some major currency, the breakup of the EU, or a global depression of some sort, perhaps all of the above.

All those government guarantees, just like the guarantees of Ambac and MBIA , are totally worthless, just in different ways.

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This article has 14 comments:

  •  
    Oct 13 11:57 AM
    Well when you are the government and you have the advantage of the printing money machine to compensate for the around trillion dollar amount of bad loans (money that just vanish in thin air with a housing bust) it doesnt take a brainer that your currency or the country is going to collapse, its just a matter of time, unless the housing bubble equilibrates of course.
    Reply
  •  
    Oct 13 12:16 PM
    Why are ambacs guarantees worthless. There is no one doing business with them ?
    Reply
  •  
    Oct 13 12:17 PM
    Lovely. Haven't seen this type of nonsense on AS for months. I assume you hold as gospel the opinions of Ackman, as well as others of his ilk, so I'll offer you some advise; beware the Pied Piper (and those like him), as he'll fill your head with nonsense and lead you astray.
    Stick to the facts and you'll find value, but follow the "spin" and you'll come up empty-handed. (hint: you're currently in the latter category)
    Reply
  •  
    Oct 13 12:49 PM
    "(money that just vanish in thin air with a housing bust) " Ishortyou

    I thought it was when loans were REPAID that fractional reserve money went back from whence it came.
    Reply
  •  
    Oct 13 01:00 PM
    You are kidding with that hogwash. Can you name one entity - corporate or municipal - that failed to get paid on an AMBAC or MBIA guaranty? You have sunk to a lowpoint in journalism. When these companies regain their AAA's, there will be oodles of business for them...
    Reply
  •  
    Oct 13 01:12 PM
    Good morning, Mish. You're quite right. I think what your critics want, aside from macro reality, is more trading ideas: how to make a buck or two while the Empire sinks itself. Just a thought.
    Reply
  •  
    Oct 13 03:34 PM
    Ah, record gains on the Dow, both point and percentage wise. Ain't it grand to earn money "the old fashion way" by having government loot the simple and poor for the sake of Wall Street? Don't forget to assuage your guilty earnings by voting for more socialism (after protecting your assets, of course).
    Reply
  •  
    Oct 13 03:43 PM
    Michael:

    The comments on MBI and ABK are not grounded in fact and add nothing to your opinions on government guarantees.

    By far the most likely outcome is that policyholders of both companies will not lose a dime.
    Reply
  •  
    Oct 13 06:18 PM
    Good point loathe-meister.

    Most likely that those gains are just shorting opportunities in disguise. Pabulum for the investing masses.

    I'm sure you must have a poem just aching to be expressed on the topic.
    Reply
  •  
    Oct 13 06:29 PM
    Smarty,
    I don't blame anyone for gaming a rigged system. Our choices for the most part are: victimize or be victimized. The system has been set up that way.

    I would appreciate it, though, if someone besides Jim Rodgers, (who is safely offshore) who grew wealthy off the system, would criticize the filthy roots of it.

    Where art thou Buffet? Where art thou Sorros? Where art thou etcetera?

    as for a poem, my muse is on maternity leave or something.
    Reply
  •  
    Oct 13 11:56 PM
    Your article just shows your total ignorance about the need and importance of one of the leaders in the financial guarantee business.

    ----

    Oct. 8 (Bloomberg) -- Eric Dinallo, superintendent of the New York State Insurance Department, comments on the outlook for the bond insurance industry. He spoke in an interview on Bloomberg Television.

    On whether there's a future for bond insurers:

    ``I think the news about the housing sales going up is really huge, because that implies that we've begun to hit bottom on the defaults and the market is beginning repricing. Then that means the defaults will begin to end as you can get some kind of a mortgage or some sort of transaction that clears prices.

    ``If that happens, then the defaults will level off, as we've said time and again, then you begin to see the bond insurers not have such a black hole that they have to pay off on.

    ``I think they do have a life and a future. I think the muni-market is being hammered in part because everyone's frozen, they don't know what rating they're going to go to market on.

    ``Once they figure out the future ratings, what they want to come to market as, I've said before that tens of thousands of small municipalities still have to commoditize. They've got to be tradable at a price, and that means at a rating. Because all of these traders are not going to do diligence for all of the municipalities out there, and that's what I think bond insurance's biggest opportunity is, is to commoditize them.


    On why bond insurers aren't on the federal government's bailout
    list: ``If the other side of their obligations is on the list, in other words if you see those CDOs getting sold into the $700 billion marketplace, then presumably the CDSs that the bond insurers have written get extinguished. ``That will be a huge up-tick for the position of bond insurers. If they get through this, then we will begin to see credit unfreeze, municipalities come to market.''


    Shttp://messages.finan...


    Cheers,


    Reply
  •  
    Oct 14 11:10 AM
    Judging from the market reaction over the past few days, MBI is seen as having some chance at viability and ABK is forgotten and thrown on the trash heap. Even if it goes to run off and has to find another line of business, ABK is way undervalued.
    Reply
  •  
    Oct 14 01:35 PM
    Mish, Mish, Mish how DARE you write a thought-provoking piece? Don't you know you will OVERLOAD the simpletons that do visit this site(smile).

    Jim Rogers (Commodities guy) is someone to be listened to. Because he pulled up stakes, sold his Manhattan plush, moved his family to Singapore is to be RESPECTED. He KNOWS what he is doing! And his track record in the commodity world is dynamic! If I could, I would do the same. Right now, the biggest decision is WHERE to go, but unfortunately, its not an easy decision. Obama as President will spell an ardous road ahead for ALL (except those Americans AND ILLEGALS who are dependent upon the Government to lead them around by the nose). Get ready, times are changing!
    Reply
  •  
    Oct 14 03:06 PM
    The extension to five years for the Euro guarantee puzzles me. It's obviously not short-term funding like the overnight markets they have in mind. Could it be all that debt coming due in the next five years? Massively indebted governments guaranteeing massive bank debts... hmmm... there's something rotten in Denmark ... I smell a rather incestuous relationship and it's begetting more an dmore idiots.
    Reply
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