Spitzer Sets Deadline for Bond Insurers; while UBS Warns of >$200B More in Potential Writedowns

Eliot Spitzer, has finally thrown down the gauntlet and it appears we will have some bond insurer resolution shortly. This should provide a near term bounce in the markets because the one thing the markets hate more than bad news is uncertainty. While it won't solve much it will at least create a sense of calm for a while anyhow. It seems the most likely solution now is these companies being split into pieces; the municipal bond side and the "junk" side. I don't know how separating the junk really helps in the big picture but I am sure the market will rally in a large way, as everyone claps like seals like they did when Buffet said "I want to take the good side of the business from you and leave the rest to rot" a few days ago. So if these companies get split up into 2 pieces, what do we do with the rotted piece? The more I read the more it looks like government might come in and swoop it up eventually. New York Governor Eliot Spitzer said bond insurers must obtain capital within days, and that he will step in if financial institutions fail to deliver a rescue plan.

• ``If these transactions aren't going to happen, then we need to act quickly,'' Spitzer said in a Bloomberg Radio interview today. ``The consequences are enormous and harm to investors and the marketplace will be enormous'' in the absence of a plan, he said.
• Regulators are pushing companies to raise $15 billion of capital to avert rating downgrades on MBIA Inc. and Ambac Financial Group Inc. that would throw doubt on the credit quality of $1.2 trillion of debt they insure. Regulators are considering splitting the bond insurers to protect their municipal bond businesses from losses linked to subprime mortgages.
• New York Insurance Department Superintendent Eric Dinallo began talks with banks, private-equity firms and sovereign wealth funds. The bond insurers probably need about $5 billion and a line of credit for $10 billion, Dinallo said in an interview yesterday.
• ``We are encouraging them to resolve these transactions quickly within a finite number of days,'' Spitzer said. ``Most conversations are with financial institutions who have the greatest exposure and the greatest interest in getting capital into those companies,'' he said, adding that he wouldn't turn away other sources of funding.

Will this stop housing prices from falling? Will it start consumers spending? Will it make the CDOs suddenly worth more? Nope, none of the above but the market won't be concerned with long term issues like that - it will just party in glee that "a solution has been found" (just like it did with the Buffet "solution"), rally - and then sell off later when they realize all the junk is still out there. Now, when the government probably steps in someday down the road - then I suppose they can cheer for real.

But until then, we await the next round of writedowns and foreign capital infusions - UBS is pegging a potential for $200B more. This is why I remain wary - the conventional wisdowm has been, $100B writedowns down, there can only be another $30-$40B more and we are in the 7th inning. I've been arguing - "huh, what planet is this Kool Aid coming from?" Now, I'll say with all the government parties swirling around with potential bailouts the situation changes by the hour - so I reserve the right to change my views based on how much the taxpayers of the USA are going to be be asked to bailout the system. But if the "free market" were allowed to rule, I think we have a long way to go down in terms of writeoffs. But I don't believe the free market will be allowed to rule when all is said and done; this is becoming more clear by the day.

• The world's banks ``remain at risk'' of up to $203 billion in additional writedowns, largely because the bond insurance crisis could worsen, UBS AG said.
• ``Banks have made progress in credit-market related writedowns,'' London-based UBS analyst Philip Finch said in a note to investors today. ``But more are expected,'' he added.
• Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, Finch estimated. That could rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. ``Risks are rising and spreading and liquidity conditions are still far from normal,'' the note said.

Once again, unprecedented times. And analyzing the situation I constantly need to make 2 scenarios - a free market scenario, and a government internvetion scenario. So gaming this becomes harder by the day as we lean more towards government inervention scenario. More transfers of wealth coming... from your pockets to "theirs".