Transparency & The Credit Crash
The miserable performance of financial stocks will continue for some time because of a continuing lack of transparency. Neither the Fed, the SEC or the Comptroller of the Currency has any idea of how much worthless mortgage securities are sitting in the portfolios of Banks and Hedge Funds. As the Wall Street Journal reportedtoday, “Fueling the concerns, Standard & Poor’s predicted yesterday that the carnage might spread to a wider range of financial institutions, with total losses potentially exceeding $265 billion.”
What is really making the market nervous is that the Monoline bond insurers like MBIA and Ambac, who stand behind these billions of losses, are in serious financial jeopardy. Yesterday a prominent Hedge Fund short seller of these companies, William Ackman, issued a report on the two big Monoline insurers:
Mr. Ackman, who runs a New York hedge fund called Pershing Square and has bet against the insurers’ shares, issued a report late in the afternoon predicting that two of the companies, MBIA and the Ambac Financial Group, might lose $24 billion on complex mortgage investments they have guaranteed. Such a hole might threaten their survival and touch off a chain reaction of losses at some of Wall Street’s biggest banks, as well as raise borrowing costs for states and municipalities.
Obviously Mr. Ackman is not a neutral observer in this matter, as he stands to make millions if the two insurers crash. The chain reaction to such a crash would redefine Warren Buffet’s warning of a “mega-catastrophic risk”brought about by the unwinding of the derivatives market. What is puzzling is that Mr. Ackman, who claims that his figures of problems are conservative, could pull together a report that the New York Insurance Commission or any of the above named Federal regulators have been unable to supply to the market. One can only reach one of two conclusions. Either the regulators know something they think will panic the market and don’t want to talk or they are too lazy to find out.
For those patient enough to read (or skim) some of this material, the transparency problems have been recognized for quite some time now. The report of the CRMPG in that link is dated July 27, 2005.
Then there are the problems with incentives, which Rag Rajan has been writing about for a while now.
The good news is that a little political will is all that’s lacking to start doing the needed repairs.