Thursday, November 22, 2007

Thanksgiving help for the market

CIFG services is getting a $1.5 billion dollar injection of cash, and it's AAA rating will be preserved, and its parent, Natixis, stock price moved up 17% on the news. Before the money was put in, they had discussions with the rating agencies. What's the point of insuring your bond if you don't have a AAA rating?

But here's the way to make money on this news. Mortgage and bond insurers Ambac (ABK 24.14) and MGIC (MTG 19.72) , whose counterparty risk was downgraded by S&P Wednesday, will now have a working model with the rating agencies on how to preserve their credit ratings. Without the ratings they're toast. But the biggest play could be bond insurer PMI Group (PMI 10.19)!

PMI owns 42% of FGIC. Market players may mistakenly think PMI's FGIC got the cash infusion. FGIC and CIFG are just a dyslexia twist away from being the same. (Don't think this doesn't happen. And the huge short base in this stock can cause crazy reactions.) Blackstone and Cypress Group each own 23% of FGIC. And they've already had discussions with the rating agencies about putting at least $200 million into PMI. So it's a buy as this news will soon hit.

Now the mortgage insurers have bought themselves some time, as ResCap did yesterday. If the Fed cuts quickly, the lifeline becomes a life preserver, tied to a dinghy.

I assumed the Fed would cut tomorrow. With the self imposed trading suspension amongst banks in Europe until Monday of mortgage debt "covered bonds" and a shortened trading day Friday, a cut would of been very effective to change psychology.

With this news, the Fed has bought themselves some time.

And I have to finish stuffing the turkey.


Anonymous said...

Ratings agencies would never lower the credit ratings of a financial guarantor, because that would put the
guarantors out of business.

Palmoni said...

That's the point! But the market is acting as though the would cut them, and if the situation became perilous, the rating agencies would negotiate w the financial guarantor.

Anonymous said...

It all works as long as the market has continued faith in the ratings agencies. Once a highly rated company blows up, all bets are off.

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