I just saw Whitney Tilson talk at the Local CFA society “free lunch” thing (it wasn’t free, it cost me $56 including parking). He gave a scary presentation explaining how screwed things are for the banks. I think I’ll be buying some more puts or something pretty soon. http://www.valueinvestingcongress.com/pdf/T2%20Partners%20presentation%20on%20mortgages&bond%20insurers-3-10-08.pdf Also, he said Seth Klarman (the guy who wrote the $1000 book we all pirated) supposedly entered into a mortgage credit default swap last year and took in $5 billion from it. He didn’t put up any cash.
very informative presentation. thanks!
pretty wild, thanks for posting that. the dissection of MBIA’s exposure to the Longshore CDO was very interesting.
Great post. Thanks for sharing that
It was a great presentation… He was supposed to talk for an hour about behavioral finance. However, he ended up talking an hour on behavioral finance and an additional 3 hours on this mortgage mess. He said the bull case for ABK is spelled out by another, more famous, value investor Marty Whitman. http://www.thirdavenuefunds.com/taf/documents/pdf/TAF_1Q_ShareholderLetters.pdf Marty calls it a “Bear Raid” among other things.
Thanks for the link. I’ve seen Whitney Tilson a few times now and he gives a first impression of a name-dropping jackass; but after a while you realize that he is just REALLY enthusiastic about investing.
Yep… he does drop a lot of names. He mentioned he had dinner with Warren Buffett the night before. He kept looking at his watch because he was off to meet Charlie Munger immediately following the luncheon. I don’t know much about Tison’s actual investment record with his hedge funds, etc. but he did write about the nasdaq bubble (pre-bursting) and his specialty is studying these type of behavioral finance issues (herding, denial, etc.).
While the presentation was interesting, I don’t think I’m ready to short MBIA at these prices based on it. It seems that all Ackman/Tilson focus on is exposure. I agree with Marty in that I’d like to see some run-off scenarios and PV analysis of premiums/claims instead of solely focusing on exposure.
He was also using timing curves to predict performance of loss severity over time. If you have a default curve that doesn’t adhere to the intial timing curve percentages and has significant front-end loss severity, the extrapolation of that loss curve using the timing curve can lead to significant gross-up predictions that are out of alignment with reality. For example, if by month 12 traditional default curves had experienced 20% of losses which would normally be 2% (equating to a 10% overall default rate), but the vintage I am extrapolating had 5% cumulative losses at 12 months, then my extrapolation would put the loss severity at 25% cumulative losses, if it had experienced 8%, then the extrapolation would yield 40%. In most cases where I have seen this happen it’s usually because a company did go down-credit in originations. However, extrapolation based upon these loss curves assumes that the pool will perform at this same rate overall. The correct assumption is that the down-credit losses will shake out and losses will level out sooner, albeit at a higher level. Now, he did extrapolate losses for each one of the Green/Yellow/Red areas, but also assumed that the losses would follow the timing curve and not experience a leveling out of losses. He could be correct that the curves will follow that timing curve, but I do not think that will be true. I do think that losses will be higher, but I do not think they’ll adhere to his loss curve projections.
Spierce, I respect your bond knowledge. You’ve posted a lot of smart things so… to paraphrase what you said: He projects continued poor performance of low fico loans and you say that low fico loans will perform badly at first then flatten out? is that correct? #2… could you read Marty Whitman’s bull case? From what I understand, Marty is not even looking at the subprime crap that got rolled up and put into another insured CDO? Lastly, in response to the runoff projections… from what I understand the parent company (what you hold stock in) can get no cash from the insurer subsidy when it’s in runoff. Runoffs last quite a while… how do you begin to value that aside from exposure like they’re doing?
Interesting insight, spierce. In the context of MBIA’s overall premium earning power on their total book and the subsequent pay-out of these losses over time, do you think that they can generate a sustainable ROE such that it makes sense to not go into run-off?
VOBA, from what I understand they are in virtual runoff now. No one is doing new business with them. In fact, if you have a bond that was insured by them it costs more than 3x as much to get it re-insured as it would if the bond had no insurance at all (I don’t understand that but I’ve heard it multiple places).
virginCFAhooker Wrote: ------------------------------------------------------- > Spierce, I respect your bond knowledge. You’ve > posted a lot of smart things so… > > to paraphrase what you said: He projects > continued poor performance of low fico loans and > you say that low fico loans will perform badly at > first then flatten out? is that correct? > > #2… could you read Marty Whitman’s bull case? > From what I understand, Marty is not even looking > at the subprime crap that got rolled up and put > into another insured CDO? > > Lastly, in response to the runoff projections… > from what I understand the parent company (what > you hold stock in) can get no cash from the > insurer subsidy when it’s in runoff. Runoffs last > quite a while… how do you begin to value that > aside from exposure like they’re doing? That is correct, I think that his scenarios are too pessimistic, but what the rating agencies projected were way too optimistic. I haven’t looked at anything else yet since I am getting hammered at work. I’ll try to look at it tonight to estimate how this works. I do think that dividends to the parent is shut down.
virginCFAhooker Wrote: ------------------------------------------------------- > VOBA, from what I understand they are in virtual > runoff now. No one is doing new business with > them. In fact, if you have a bond that was > insured by them it costs more than 3x as much to > get it re-insured as it would if the bond had no > insurance at all (I don’t understand that but I’ve > heard it multiple places). I was speaking with a friend of mine who issues bonds which *rarely* get traded on the secondary market. For the last 4 years they have issued wrapped bonds exclusively (BBB attachment to AAA), with a wrap fee in the low 20bps. Their spreads for their 1H07 deal was 23bps. Last week two of his bonds got traded because holders were reducing wrap exposure. There has been *no* degredation in the collateral, it’s an investment grade servicer/seller, and current performance has tracked with historical as well as projected losses very well, even in the last 6-12 months. Both trades went out at the +800 level for 2 year paper. 2-year BBB paper at +800 is absolutely ridiculous, especially since it’s not subprime mortgages.
virgin–has there been a recent write-up on MBIA on VIC? With the 45 day delay, obviously I can’t see for myself.
No, there has been no writeup on MBIA. The writeup of GS that came out at the end of 2006 talked about the mortgage crisis in the follow up notes. Someone just did a short sell JPM writeup that was pretty good. The people there that write up financials really know their stuff…