1. Impact of losses measured on post-tax basis

• Should be $5.13B (assuming a tax rate of 38%), not $3.18B

2. Covenant Violations and Loss of Access to Liquidity Facilities

• Lose access to $500M

3. Loss Estimates Must Incorporate Reinsured Exposures

• $42B ($21.5B is CDOs of ABS or CLO/CBOs) of reinsurance from Channel Re should be put back on the balance sheet
  
• $11B from Ram Re
  
• MBIA reinsures Ambac, and Ambac reinsures MBIA

4. Bond Insurers’ Investment Portfolios are Riskier Than They Appear

• Portfolios include substantial amount of bonds guaranteed by bond insurer itself or other bond insurers

5. Commercial Mortgage Backed Securities (CMBS) Problems Ignored

• MBIA insured $43B net par of CMBS securities (vast majority underwritten in 2006 & 2007)
  

6. Claims-Paying Resources Definition Overstates Capital Available to Pay Claims

• Include present value of future premiums discounted at extremely low discount rates (~5%)
  
  • Ignore defaults or prepayments
    
  • Purchasers of secondary market guarantees likely to terminate periodic premium payments
    
  • No provision for overhead, remediation, legal, or other costs required to run the business

7. Holding Company Liquidity Risk

• The holding company has $45B of derivative obligations (currency, interest-rate, + CDS)
  
• Holding company legal expenses and litigation claims
  
• Holding company downgrade scenarios
  

Historically, AAA corporate bonds have performed up to 80x worse (based on defaults) than A muni bonds. Care to guess how AAA CDO bonds performance compares? So ratings by themselves are often relatively worthless. Now if I was to guess what the quant risk models are based on….

Considering my gains the past 9 – 12 months have come shorting financials (or being long gold) I’m pondering when to unwind these positions. Based on the write downs and continued freezing of the credit markets I don’t think financials have bottomed.

One metric I follow is the US banks non-borrowed reserves published by the fed, every two weeks, which are now negative and have been for three weeks.  I’m sure this played are part into why the fed lowered the fed funds rate an unprecedented 1.25% over 8 days. US banks non-borrowed reserves have fallen to a NEGATIVE $15 billion (last row on page 2, in the column nonborrowed).  I’m not implying the banking system is bankrupt; I’m implying several major banks are technically insolvent.  And yes, I realize that has happened before and many of the insolvent banks (including Citibank) recovered.

So far this year I’ve sold my puts on XHB, MBI, and PMI, but I think the financial sector will hit a new bottom. The bond market is usually a good leading indicator for the stock market and right now the pendulum in bond market has swung from greed to fear. I look forward to a bottoming in the financial market so the economy can get back to growing and I can get back to focusing on investing in the technology industry.