Believe it or not, it looks like we were right about something: both sides of commutations are gaining from unwinding those contracts.
RBC today reported a gain of $102M on its commutation settlement with MBIA. While this may indicate that MBIA could have bargained for a better deal, it should help attract other banks to the settlement table.
MBIA CFO Chuck Chaplin said on the Q4 conference call that "the cost to commute these deals was somewhat below our loss reserves, contributing to a net reduction in economic losses of $182 million" on $15.7B of notional commutated policies.
We are happy with what Chuck also said regarding commutations: "We acknowledge that we've got a ways to go in this regard, but we're satisfied and believe that we have a positive trend at this point." As we said previously, we think commutations were a clear but below-potential positive in the quarter. While MBIA cannot force banks into mutually beneficial agreements, at least they appear to be trying.
Showing posts with label Accounting. Show all posts
Showing posts with label Accounting. Show all posts
Thursday, March 3, 2011
Tuesday, March 1, 2011
Mortgage Bond Math Coming to a Head - MBIA, Citi
When we asked readers for direction, they demanded that we relentlessly repeat ourselves ad nauseum. We oblige with this.
Tomorrow we will see what the mortgage bond math we previously discussed brought to MBIA through the end of 2010. (Click the accounting tab or here for relevant posts.) As we have said before, in many cases we think that there is room for both sides to declare accounting and economic victory in commutations settlements. We also think you will see a good amount more deals at the end of the first quarter.
The reason behind the first quarter's announcements will be brought to fruition less by the accounting than those in the year end report. Of course there will be elements of math, economics and law tied to any commutation settlements. Those will continue to be the powder, but the spark is coming from human tendencies and game theory.
By human tendency we allude to the manner in which people fail to recognize a good thing until its gone. Look to any market as an example, assets are no longer cheap when they are widely loved. Or look to the particularly relevant dynamic of refinancing in interest rate cycles; refinancing surges when mortgage rates start to tick up off the bottom. People plan to sell at the top and buy at the bottom.
By game theory we allude to the Mexican standoff in which a ring of banks saw RBC and some smaller Canadian banks shoot first. Once the shooting starts, everybody fires. JP Morgan, Barclay's, and - it seems - Morgan Stanley joined in. Today by way of stipulations for discontinuance with prejudice in MBIA's transformation suits, we learned that Citi has joined in the fray. Some combination of these last four banks were a big reason for MBIA's sharp tightening of CDS spreads over the past month.
These were the incentives to shoot early:
-Unwind hedges while spreads are wide, before other banks drive them lower by exiting first.
-Use transformation litigation exit as bargaining instrument before adverse case developments weaken bargaining position (via discontinuance of other parties and/or further plaintiff-adverse rulings.)
-Achieve more advantageous price before MBIA Corp achieves a stronger financial - and therefore bargaining - position.
-Garner goodwill with a potentially reemerging structured finance and municipal heavyweight.
In our view, the transformation challenge has little hope of success. While this on its own suggests the dropouts are not part of significant deals, we view it as overwhelmed by:
-The incentives to shoot early.
-MBIA CDS movement.
-Disclosures by banks.
-Disclosures by MBIA.
-Various media and research reports.
-Bank benefits in achieving capital relief.
Finally, we think that our stance will be widely accepted by March 2nd due to JP Morgan and Barclay's deals in Q4. However, these deals may have been structured to be realized in Q1 to take advantage of a longer period of less disclosure, including wider credit spreads. Morgan Stanley, Citi and perhaps a follow on (or the only) Barclay's deal are top candidates for Q1 realized commutations.
Mortgage bond transactions held by, widely dispersed and actively traded amongst third parties and will be more difficult to settle than the "derisking" and warehouse type of deals on the banks balance sheets. For that reason, countrywide-type cases will take longer. Bank of America needs to take another bath while Ally needs more of a hand washing as discussed here.
Not surprisingly, Bank of America came to the Mexican standoff with an empty water pistol. While we don't think they will be destroyed, we agree with the market valuations in that they will be shot by billions more in losses.
The other banks, along with MBIA will likely have some potent disclosures in their imminent 10-K filings. When that happens, we will oblige you with more drum-beating.
Tomorrow we will see what the mortgage bond math we previously discussed brought to MBIA through the end of 2010. (Click the accounting tab or here for relevant posts.) As we have said before, in many cases we think that there is room for both sides to declare accounting and economic victory in commutations settlements. We also think you will see a good amount more deals at the end of the first quarter.
The reason behind the first quarter's announcements will be brought to fruition less by the accounting than those in the year end report. Of course there will be elements of math, economics and law tied to any commutation settlements. Those will continue to be the powder, but the spark is coming from human tendencies and game theory.
By human tendency we allude to the manner in which people fail to recognize a good thing until its gone. Look to any market as an example, assets are no longer cheap when they are widely loved. Or look to the particularly relevant dynamic of refinancing in interest rate cycles; refinancing surges when mortgage rates start to tick up off the bottom. People plan to sell at the top and buy at the bottom.
By game theory we allude to the Mexican standoff in which a ring of banks saw RBC and some smaller Canadian banks shoot first. Once the shooting starts, everybody fires. JP Morgan, Barclay's, and - it seems - Morgan Stanley joined in. Today by way of stipulations for discontinuance with prejudice in MBIA's transformation suits, we learned that Citi has joined in the fray. Some combination of these last four banks were a big reason for MBIA's sharp tightening of CDS spreads over the past month.
These were the incentives to shoot early:
-Unwind hedges while spreads are wide, before other banks drive them lower by exiting first.
-Use transformation litigation exit as bargaining instrument before adverse case developments weaken bargaining position (via discontinuance of other parties and/or further plaintiff-adverse rulings.)
-Achieve more advantageous price before MBIA Corp achieves a stronger financial - and therefore bargaining - position.
-Garner goodwill with a potentially reemerging structured finance and municipal heavyweight.
In our view, the transformation challenge has little hope of success. While this on its own suggests the dropouts are not part of significant deals, we view it as overwhelmed by:
-The incentives to shoot early.
-MBIA CDS movement.
-Disclosures by banks.
-Disclosures by MBIA.
-Various media and research reports.
-Bank benefits in achieving capital relief.
Finally, we think that our stance will be widely accepted by March 2nd due to JP Morgan and Barclay's deals in Q4. However, these deals may have been structured to be realized in Q1 to take advantage of a longer period of less disclosure, including wider credit spreads. Morgan Stanley, Citi and perhaps a follow on (or the only) Barclay's deal are top candidates for Q1 realized commutations.
Mortgage bond transactions held by, widely dispersed and actively traded amongst third parties and will be more difficult to settle than the "derisking" and warehouse type of deals on the banks balance sheets. For that reason, countrywide-type cases will take longer. Bank of America needs to take another bath while Ally needs more of a hand washing as discussed here.
Not surprisingly, Bank of America came to the Mexican standoff with an empty water pistol. While we don't think they will be destroyed, we agree with the market valuations in that they will be shot by billions more in losses.
The other banks, along with MBIA will likely have some potent disclosures in their imminent 10-K filings. When that happens, we will oblige you with more drum-beating.
Wednesday, February 16, 2011
Our Ally
We write a lot about MBIA here for several reasons, the main one being that they are the leader in recovery litigation. So, when the SEC document alert arrives from MBIA informing us of Jay Brown’s testimony, we pump up "Eye of the Tiger" and dive in. But the specifics we discuss apply to other guarantors.
First we found some very helpful, new information in the form of claims-paid information by sponsor:
“As a result of their actions, we have paid out over $4.2 billion in claims through September, including $2.5 billion on Countrywide-sponsored transactions, $1.3 billion on transactions sponsored by what is now Ally Bank, $333 million on a Credit Suisse-sponsored transaction, and $76 million on a Morgan Stanley-sponsored transaction.”
JP Morgan and Barclay’s are notably absent. This suggests that losses if any would be CDO form. We have previously noted that our perceived prevalence of CDO exposure in the case of JP Morgan contributed to the ease with which a commutation would be effected. This is because of the lack of recovery bookings on the part of MBIA and the long tenor of the counterparty exposure on the part of JP Morgan.
There is nothing really revolutionary in that. But we were surprised by Ally being so far up the list. Then we started thinking about another excerpt:
“All but one, which commendably recognized its obligation and amicably resolved the issue, have demanded that the parties engage in “loan-by-loan combat”.”
The first bank that comes to mind is JP Morgan and their higher reserves and recognition of liability, but that is far from a certainty. Why not Ally? Could be. Who knows? Its not so important.
What follows might be.
Thinking back to Ally’s settlement with the GSEs (our thoughts at the time are here), the reserves Ally had booked were higher than their outstanding put-back requests. Perhaps we should have surmised at the time that such could only be the case if a guarantor was pursuing legal remedies rather than actual put-back requests. We found Ally to have about $800M in reserves after settling with the GSEs. Wouldn’t you know that their 2010 YE reserves are $830M after the GSE settlements.
So far our speculation suggests that MBIA could be a big part of that. But the Devil is in the details and wouldn’t you know that there is a great footnote on page 96 of Ally’s Q3 2010 10Q:
“(a) A significant portion of monoline unresolved repurchase demands are with one counterparty.”
Now let’s pair that with what we know about MBIA’s booked recoveries. Importantly, MBIA has booked recoveries for $2.2B related to mortgage repurchases or roughly half of already paid claims. Just for some insight lets consider what Ally's recovery bookings would be at half: $650M. We think MBIA will get more, but its feasible that MBIA and Ally do not mismatch by an insurmountable margin.
Ally has publicly been trying to put the repurchase baby to bed. They have made significant progress as related in a February 2 presentation at a Morgan Stanley Conference:
“• Ally is addressing repurchase risk through settlements and established reserves
• Settlements
– Completed settlements with seven counterparties, including both Freddie Mac and Fannie Mae
– Settlements have been generally in line with established reserves”
Fannie, Freddie and five others have reached settlements. Based on MBIA’s significant losses and Ally’s significant monoline disclosure, lets say that MBIA has not settled, several others have, and this mortgage math might be summing up nicely. We are encouraged by what we perceive as MBIA not settling for too low a number. Even if both companies have booked a similar amount.
Ally is not a plaintiff in the Article 78 case. They also appear to be the front runner for first major RMBS settlement.
Monday, February 14, 2011
More Mortgage Math, Commutations and Morgan Stanley
Shannon Harrington of Bloomberg News published a good article on MBIA CDS recently. (Available here.) Here’s a key quote:
“Swaps traders are speculating that banks are overpaying for default protection as MBIA, based in Armonk , New York
We don’t know where Shannon gets his information, and this may in fact be third-party market participants moving the CDS. However, we think that given the math we have pointed out regarding commutations, this CDS movement may be due to an unwind. As may have been the movement in October. This may even be Morgan Stanley.
Also of note in the above quote is the losses on hedges against MBIA. There are two key points on this. First, in contradiction to the implications we drew from the 2009 10-K (here), this makes it clear that Morgan Stanley has significant direct hedges on MBIA itself and not just the underlying transactions.
Second, we believe that at least a portion of the $535M losses reference are the actual realization of what we have already pointed out is a first-mover advantage. That is an advantage Morgan Stanley appears to have missed out on, while JP Morgan, Barclays, and some smaller banks captured.
Expect more deals and look forward to March 1st; a tremendous date.
Thursday, February 10, 2011
Mortgage Bond Math Really Means Everyone is a Winner II
Here is a real example of the accounting that we talked about in an earlier look at the alleged mismatch of reserves between monolines and banks (here.) In summary, we witnessed that monoline-credit, litigation and repurchase reserves at banks should be summed to compare against recoveries booked against monolines. Why? To the surprise of many, even investment banks can only lose a dollar once.
Special thanks to the leading analyst that pointed out this example. The excerpt that follows is from Morgan Stanley's 2009 10-k.
The disclosure states that Morgan Stanley's exposure is "principally MBIA Inc." Morgan Stanley does not reveal how exposure is measured (i.e. by total loss or total par insured). It does go on to reveal $2.8B in credit reserves and nearly $2B in (CDS) hedges by way of inference. If one only considers the credit reserves and assumes that MBIA makes up $1B of that, well then either Morgan Stanley would shockingly accounts for half of MBIA's expected repurchase reserves OR - and perhaps more shockingly to most people - Morgan Stanley's MBIA credit-loss reserves would exceed MBIA's Morgan Stanley recovery bookings.
And that gives no value to the proceeds Morgan Stanley would realize from unwinding hedges against monoline exposure, which in MBIA's case would most likely exceed a quarter of the notional value hedged. However, the excerpt suggests that Morgan Stanley actually hedged its monoline exposure using derivatives on the underlying exposure, not on the insurer. In that case, benefits from unwinding hedges would not act as an addition to loss/repurchase/litigation reserve metric. This examination has also given no consideration to any actual litigation and repurchase reserves; the beauty is in it not having to do so.
This is the math that (while still undisclosed in most cases) led JP Morgan and the Canadian Banks to commutate their MBIA exposure. Both sides probably gained. We have just gone through a hypothetical scenario that, while full of assumptions, nonetheless underpins strong incentives for Morgan Stanley to come to the table with its financial guaranty counterparties.
Perhaps they already have.
Special thanks to the leading analyst that pointed out this example. The excerpt that follows is from Morgan Stanley's 2009 10-k.
Monoline Insurers. Monoline insurers (“Monolines”) provide credit enhancement to capital markets transactions. 2009 included losses of $231 million related to Monoline credit exposures as compared with losses of $1.7 billion in fiscal 2008 and losses of $203 million in the one month ended December 31, 2008. The current credit environment continued to affect the capacity of such financial guarantors. The Company’s direct exposure to Monolines is limited to bonds that are insured by Monolines and to derivative contracts with a Monoline as counterparty (principally MBIA Inc.). The Company’s exposure to Monolines as of December 31, 2009 consisted primarily of asset-backed securities bonds of approximately $458 million in the portfolio of the Company’s
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Table of Contents
Subsidiary Banks that are collateralized primarily by first and second lien subprime mortgages enhanced by financial guarantees, approximately $2.0 billion in insured municipal bond securities and approximately $651 million in net counterparty exposure (gross exposure of approximately $5.4 billion net of cumulative credit valuation adjustments of approximately $2.8 billion and net of hedges). Net counterparty exposure is defined as potential loss to the Company over a period of time in an event of 100% default of a Monoline, assuming zero recovery. The Company’s hedging program for Monoline risk includes the use of transactions that effectively mitigate certain market risk components of existing underlying transactions with the Monolines.
-The disclosure states that Morgan Stanley's exposure is "principally MBIA Inc." Morgan Stanley does not reveal how exposure is measured (i.e. by total loss or total par insured). It does go on to reveal $2.8B in credit reserves and nearly $2B in (CDS) hedges by way of inference. If one only considers the credit reserves and assumes that MBIA makes up $1B of that, well then either Morgan Stanley would shockingly accounts for half of MBIA's expected repurchase reserves OR - and perhaps more shockingly to most people - Morgan Stanley's MBIA credit-loss reserves would exceed MBIA's Morgan Stanley recovery bookings.
And that gives no value to the proceeds Morgan Stanley would realize from unwinding hedges against monoline exposure, which in MBIA's case would most likely exceed a quarter of the notional value hedged. However, the excerpt suggests that Morgan Stanley actually hedged its monoline exposure using derivatives on the underlying exposure, not on the insurer. In that case, benefits from unwinding hedges would not act as an addition to loss/repurchase/litigation reserve metric. This examination has also given no consideration to any actual litigation and repurchase reserves; the beauty is in it not having to do so.
This is the math that (while still undisclosed in most cases) led JP Morgan and the Canadian Banks to commutate their MBIA exposure. Both sides probably gained. We have just gone through a hypothetical scenario that, while full of assumptions, nonetheless underpins strong incentives for Morgan Stanley to come to the table with its financial guaranty counterparties.
Perhaps they already have.
Saturday, January 22, 2011
Mortgage-Bond Math Really Means Everyone is a Winner
Another letter, this one real. Perhaps the title should end with "Everyone (that was a loser) is a Winner."
Dear Mr. Weil,
I enjoy reading you regularly. The title "Mortgage-Bond Math Means Everyone is a Winner" would be apropos for a contrary look of the same topic. (Click here for the original article.)
First, Bank of America yesterday joined JP Morgan in revealing that they are expensing undisclosed amounts related to the putback and broader private mortgage securities demands into a "litigation reserve" account. This is what reminded me of your article published in mid December.
But perhaps more significantly, banks have sustained large write-downs on their counterparty exposure to the monolines. B of A mentioned in their call yesterday reducing exposure to monolines in their FICC unit, suggesting they are no exception. Given the credit leverage in the bond insurance business, such exposure could be very large. This means that a commutation settlement could result in both sides declaring accounting victory despite the mismatch you have pointed out. For the same reason, banks could pay out substantial sums but receive a net-benefit if the perception of MBIA's credit quality improves markedly as a result. Though this offends logic, such is the intersection of market and accrual accounting in this case.
Regards,
Mark Tapley
P.S. I'm going to blog this here: http://tapleysbluedragon.blogspot.com/
--
Connect with me on LinkedIn: http://uk.linkedin.com/pub/
The Morgan Stanley example of this math has been posted here.
Dear Mr. Weil,
I enjoy reading you regularly. The title "Mortgage-Bond Math Means Everyone is a Winner" would be apropos for a contrary look of the same topic. (Click here for the original article.)
First, Bank of America yesterday joined JP Morgan in revealing that they are expensing undisclosed amounts related to the putback and broader private mortgage securities demands into a "litigation reserve" account. This is what reminded me of your article published in mid December.
But perhaps more significantly, banks have sustained large write-downs on their counterparty exposure to the monolines. B of A mentioned in their call yesterday reducing exposure to monolines in their FICC unit, suggesting they are no exception. Given the credit leverage in the bond insurance business, such exposure could be very large. This means that a commutation settlement could result in both sides declaring accounting victory despite the mismatch you have pointed out. For the same reason, banks could pay out substantial sums but receive a net-benefit if the perception of MBIA's credit quality improves markedly as a result. Though this offends logic, such is the intersection of market and accrual accounting in this case.
Regards,
Mark Tapley
P.S. I'm going to blog this here: http://tapleysbluedragon.blogspot.com/
--
Connect with me on LinkedIn: http://uk.linkedin.com/pub/
The Morgan Stanley example of this math has been posted here.
With Love, Jamie Dimon - Reserves Revealed
A faux letter from Jamie to Jay.
To my only Jay,
Thank you for suing us. Without that action, all would be revealed and so much would be lost.
Pleased to tell you more.
We realized over a year ago that we were going to pay you for all that crap that Bear Stearn's, Washington Mutual and our legacy underwriters crammed into the securities that you guaranteed. And as an honest banker I resolved to reserve for it. You, my knight in shinning armor, gave me the opportunity to funnel these reserves into a litigation reserve rather than an outright and obvious repurchase reserve. It was so sweet of you, Jay!
This allowed me and my peers (Brian asked to be remembered to you) to begin building reserves to your exposure without revealing how much we have reserved. I had over $5B stowed away for you boys even before our little deal! (The little deal: Link.) As we did create an account expressly labeled "repurchase reserves" for the GSE exposure, quietly segregating the non-GSE exposure helped downplay the rewards to those who seek and might seek retribution against us.
We've all done it! Brian just fessed up to it today. So again, thank you for suing us. It has been a great excuse to hide this stuff, even though the temptation to show our swollen reserves in time overcame us. The SEC and public questioning increased that temptation markedly. As for our recent settlements now that they are done, let me tell you more.
They say I have betrayed them by settling with you, Jay. But consider this: if the passage of time will reveal the insolvency of MBIA Corp, why on Earth are they pressing for expedited consideration from the NY Court of Appeals? The roles are inapposite to their allegations, as your team drags things out and they push it through. Here's why: the fraud case won't stand a chance if actual subrogation recoveries exceed the paltry $2B you have booked and loss developments peter out. Perhaps its the boys at Sullivan & Cromwell trying to earn fees before the gig is up. Or perhaps the banks would like a better hand at the negotiating table. Regardless, the uncertainty of the future becomes the certain present all too quickly, making discounts disappear. An Edgeworth box can shrink around one's neck like a Chinese finger trap in these situations. So, JP Morgan followed RBC and the little maple leaf squads, taking the first movers haircut now rather than the close shave of the law later. You know the rest of the salient points, as they have been told here before.
All the banking conference calls will have questions and comments on litigation reserves from here on out. Some will continue to mask the quantity. Brian will continue with the ostrich approach before throwing out another kitchen sink. We have done a good job, and will let further expense trickle through as need be. In this situation, we've been one step ahead. It's been a pleasure benefiting you benefiting us.
Thanking you,
Jamie
To my only Jay,
Thank you for suing us. Without that action, all would be revealed and so much would be lost.
Pleased to tell you more.
We realized over a year ago that we were going to pay you for all that crap that Bear Stearn's, Washington Mutual and our legacy underwriters crammed into the securities that you guaranteed. And as an honest banker I resolved to reserve for it. You, my knight in shinning armor, gave me the opportunity to funnel these reserves into a litigation reserve rather than an outright and obvious repurchase reserve. It was so sweet of you, Jay!
This allowed me and my peers (Brian asked to be remembered to you) to begin building reserves to your exposure without revealing how much we have reserved. I had over $5B stowed away for you boys even before our little deal! (The little deal: Link.) As we did create an account expressly labeled "repurchase reserves" for the GSE exposure, quietly segregating the non-GSE exposure helped downplay the rewards to those who seek and might seek retribution against us.
We've all done it! Brian just fessed up to it today. So again, thank you for suing us. It has been a great excuse to hide this stuff, even though the temptation to show our swollen reserves in time overcame us. The SEC and public questioning increased that temptation markedly. As for our recent settlements now that they are done, let me tell you more.
They say I have betrayed them by settling with you, Jay. But consider this: if the passage of time will reveal the insolvency of MBIA Corp, why on Earth are they pressing for expedited consideration from the NY Court of Appeals? The roles are inapposite to their allegations, as your team drags things out and they push it through. Here's why: the fraud case won't stand a chance if actual subrogation recoveries exceed the paltry $2B you have booked and loss developments peter out. Perhaps its the boys at Sullivan & Cromwell trying to earn fees before the gig is up. Or perhaps the banks would like a better hand at the negotiating table. Regardless, the uncertainty of the future becomes the certain present all too quickly, making discounts disappear. An Edgeworth box can shrink around one's neck like a Chinese finger trap in these situations. So, JP Morgan followed RBC and the little maple leaf squads, taking the first movers haircut now rather than the close shave of the law later. You know the rest of the salient points, as they have been told here before.
All the banking conference calls will have questions and comments on litigation reserves from here on out. Some will continue to mask the quantity. Brian will continue with the ostrich approach before throwing out another kitchen sink. We have done a good job, and will let further expense trickle through as need be. In this situation, we've been one step ahead. It's been a pleasure benefiting you benefiting us.
Thanking you,
Jamie
Tuesday, January 11, 2011
MBIA/JP Morgan Commutation II - Shhh!
There has been a large commutation. The evidence suggests it was good for MBIA. (see The Eureka Moment: http://tapleysbluedragon.blogspot.com/2011/01/commutation-settlements-jay-told-us.html).
Unfortunately, there may not be much to learn from JP Morgan's Q4 earnings call this Friday. JP Morgan has done a good job of building above average reserves while shrouding the litigation under a fog of war. A Jamie Dimon quote on the company's Q3 call typifies the company's enigmatic strategy:
"I think the way you should look at this topic is that we're bearing today $7 billion of charge-offs, foreclosure, repurchase costs - this affects reserves. That $7 billion will go up or down based upon the economy and stuff like this. I'm not sure stuff like this is going to dramatically change that number. It may extend it a little bit longer and stuff like that but - and remember we have in total, between repurchase reserves and the $11 billion, we have $14 billion of reserves for repurchases or loan losses. And look, the mortgage thing is - we're halfway through all this."
Analyst's interpreted this as everything from $7B with $1B left to expense to $14B with potentially the same amount left to expense. But what can we really learn from this? There are $7B of loan loss reserves. Elsewhere, we see there are $3.3B of repurchase reserves. What's left is litigation reserves, though JP Morgan doesn't expressly say so. But lo, a footnote on page 31 of their Q3 fnc'l supplement notes that they have $4.3B of non-compensation litigation expenses YTD. Dimon indicated that none of this was in regards to "foreclosure-gate." Either this is the greatest coincidence since the cookies disappeared and your 1st grader had chocolate all over her face or 14-7-3= JP Morgan knows its ponying up.
This is no coincidence. This cryptic quote by Mr. Dimon is the hint we needed to know that most of that $4.3B is related to repurchase and related litigation. But it hasn't actually been disclosed to us and probably won't be - even in this opaque fashion - again. Having an undisclosed reserve means an undisclosed settlement. In the case of a settlement that is good for the guy across the table, undisclosed terms help prevent a rush to the courthouse (as contemplated here: http://tapleysbluedragon.blogspot.com/2011/01/latest-settlement-until-next-one.html).
What this all means for investors and observers: don't get down on MBIA and the bond insurers this Friday if Dimon is popping Champagne on great earnings. A large realized gain at MBIA is not precluded by a solid JP Morgan quarter. As I've argued before, the finances make sense on both sides but the opportunity for investors is greater with the guarantors.
Here's one more reason this deal made eminent sense: JP Morgan just took out the star running back of the repurchase/CDO fraud rush to the courthouse. We'll see if it took a defensive end or a safety to do it, but its safe to say it took more than the ball boy. My guess is that it was the linebacker. So - and this is interesting from a JP Morgan point of view - how will the rest of the guarantor team move the ball down field? Mr. Frederico described himself as a glutton for punishment on Assured's Q4 call, but don't expect him to lead his parched competitors to water. He is busy in the tub.
Ambac, Syncora, FGIC are going to have to muster up the resolve and cash to see their cases through. They won't get any inspiration this week.
Unfortunately, there may not be much to learn from JP Morgan's Q4 earnings call this Friday. JP Morgan has done a good job of building above average reserves while shrouding the litigation under a fog of war. A Jamie Dimon quote on the company's Q3 call typifies the company's enigmatic strategy:
"I think the way you should look at this topic is that we're bearing today $7 billion of charge-offs, foreclosure, repurchase costs - this affects reserves. That $7 billion will go up or down based upon the economy and stuff like this. I'm not sure stuff like this is going to dramatically change that number. It may extend it a little bit longer and stuff like that but - and remember we have in total, between repurchase reserves and the $11 billion, we have $14 billion of reserves for repurchases or loan losses. And look, the mortgage thing is - we're halfway through all this."
Analyst's interpreted this as everything from $7B with $1B left to expense to $14B with potentially the same amount left to expense. But what can we really learn from this? There are $7B of loan loss reserves. Elsewhere, we see there are $3.3B of repurchase reserves. What's left is litigation reserves, though JP Morgan doesn't expressly say so. But lo, a footnote on page 31 of their Q3 fnc'l supplement notes that they have $4.3B of non-compensation litigation expenses YTD. Dimon indicated that none of this was in regards to "foreclosure-gate." Either this is the greatest coincidence since the cookies disappeared and your 1st grader had chocolate all over her face or 14-7-3= JP Morgan knows its ponying up.
This is no coincidence. This cryptic quote by Mr. Dimon is the hint we needed to know that most of that $4.3B is related to repurchase and related litigation. But it hasn't actually been disclosed to us and probably won't be - even in this opaque fashion - again. Having an undisclosed reserve means an undisclosed settlement. In the case of a settlement that is good for the guy across the table, undisclosed terms help prevent a rush to the courthouse (as contemplated here: http://tapleysbluedragon.blogspot.com/2011/01/latest-settlement-until-next-one.html).
What this all means for investors and observers: don't get down on MBIA and the bond insurers this Friday if Dimon is popping Champagne on great earnings. A large realized gain at MBIA is not precluded by a solid JP Morgan quarter. As I've argued before, the finances make sense on both sides but the opportunity for investors is greater with the guarantors.
Here's one more reason this deal made eminent sense: JP Morgan just took out the star running back of the repurchase/CDO fraud rush to the courthouse. We'll see if it took a defensive end or a safety to do it, but its safe to say it took more than the ball boy. My guess is that it was the linebacker. So - and this is interesting from a JP Morgan point of view - how will the rest of the guarantor team move the ball down field? Mr. Frederico described himself as a glutton for punishment on Assured's Q4 call, but don't expect him to lead his parched competitors to water. He is busy in the tub.
Ambac, Syncora, FGIC are going to have to muster up the resolve and cash to see their cases through. They won't get any inspiration this week.
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