Monoline Hedging - Disaster Du Jour

Please alert me when you think I am piling on.

With the government basically throwing $3 Trillion at the system in an attempt to try and fix just the mortgage mess, are we now moving unto the next serious down leg of the credit cycle?

Whats next? Commercial Real Estate? Credit Card Losses? HELOC?

As if there was nothing else to talk about.

Another potential disaster that most analysts/investors have not spoken about is the exposure that most Investment Banks have to Monoline Insurance. These type of contracts are called Monoline Hedges, and they have yet to be properly accounted for.

We all know what Credit Default Swaps are(If you don't, please move back to the tarpits). Companies like AIG, Ambac, MBIA, and MGIC that sold insurance on toxic mortgages and complex credit derivatives subsequently blew up, but what about the companies that actually bought the insurance from them? How do you account for that? You buy insurance on bonds that you think are risky, yet the company you buy it from is insolvent?
The banks that bought this type of protection could see the value of their assets in the first half fall by tens of billions of dollars. More Write downs are coming.

Before the current credit crisis hit us full force in the grill, before rising delinquencies, falling home prices, and before the words 'Toxic' and "CDS" actually existed, there was a wonderful business called Bond Insurance that existed. The bond insurance companies sold insurance protecting holders against default. This business was a cash machine, as most of the business was centered around Muni Bond Insurance, but of course, risk management went out the window, when these outfits started to insure more complex derivative instruments like CDS, CDO, CLO, and Subprime Tranches.

But the out right defaults of many tranches of mortgages/derivatives, has prompted fears that the monlines wont be able to pay out on these defaults, basically the premiums that the banks paid for are worthless. As a result, more and more banks will have to writedown the value of their insurance contracts that they have via the Monoline Insurers.

This has the potential to be a bigger problem, as the value of these hedges have considerably dropped while the general CDS Curves have widened, portending more pain ahead.

UBS, Deutsche Bank, Credit Suisse, and Morgan Stanley are the ones with the most exposure here. I would be short the Moose ahead of its earnings report.

Market Thought-

We are going lower.

Earnings tonight from Intel will set the stage for Tech. The Nasdaq which has rallied this year, needs a strong number from INTC. The stock has rallied some 32% off its February lows. This number and their forward guidance needs to be strong to support higher prices. The stock actually looks great technically, so any good news can have this stock climb above resistance, but if they have anything bad to say about PC end user demand, we have problems in tech land.

Thursday looks to be the big day as JP Morgan and Google report their numbers.

Goldman Sachs down a nice 10% today....This stock will go to Par (100) at the minimum.

Morgan Stanley also down 11%, I have stated before that the Moose is in trouble.

I see the financials are down 6% across the board, I see a vicious sell off if JP Morgan doesn't surprise the street with great earnings.

Ben Bernanke on the tape stating that he likes the recent change in Mark to Market regulations....enough said!