Interest Rate Roundup

Thursday, October 25, 2007

MBI, AIG in FF ... and how about those oil prices

Shares of MBIA and AIG are in Free Fall right now. MBIA is a bond insurer, like the company Ambac that I discussed yesterday. AIG is a diversified insurance and financial guaranty firm. Here's why they're getting hit ...

* MBIA says a $1.8 billion SIV it manages is having trouble raising money. It also reported a quarterly net loss for the first time in history because of losses on mortgage securities. Writedowns totalled $342 million before tax.

* AIG is taking a beating on rumors and speculation that it could face large write downs as well. These are just rumors -- no way to confirm. But the company's shares are getting whacked, and its credit default swaps are widening out (a sign the credit markets are more worried about credit quality).

UPDATE: CNBC reports AIG denying major write-down rumor.

Both of these firms -- and many other financials that have run into trouble recently -- have heavy dealings in credit insurance, Collateralized Debt Obligations (CDOs), Structure Investment Vehicles (SIVs) and all kinds of other fun stuff no one on Main Street understands. The surprise is that Wall Street doesn't seem to know what a lot of this junk is worth, either. A ton of paper was apparently valued at "mark to model/malarkey" levels -- levels that have little basis in reality. The write-downs were seeing throughout the financial industry now are the result of attempts to hammer some approximate values out.

And on a completely unrelated note, crude oil prices just hit a record $90.48 a barrel. Yowzer. Then again, is it really completely unrelated? My suspicion is that some of the gain is a pure side effect of easy money. In other words, investors are buying crude on the assumption that "financial market turbulence = Fed panics = 50 basis point cut = more dollar weakness = oil producers demand a higher dollar price of crude to compensate for lost purchasing power." Just a theory, but it's as good as any.


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