The bond Insurer soap opera once again took center stage in the afternoon trading. There were some mentions on the United States financial channel CNBC that the ‘bail out’ of Ambac (ABK) was still being worked on. And that an announcement may be coming soon, tonight, tomorrow, next week? But every time CNBC says that the back room negotiations are still taking place and the market reacts as if a bail out of the bond insurer(s) will save the world. If you read some of the public message boards there are people who are apparently betting their whole life savings on Ambac’s bailout and sending the stock into the stratosphere. How sad, to risk so much on something so questionable. What if the bail out (if there is one) turns out to be a dilution to shareholder value? Then those betting so much will lose so much. What if the bail out package (again, if there is one) requires the company to break apart? Again, could be a disaster for current shareholders. No matter what happens, the injection of billions of dollars into Ambac and/or MBIA is a reflection of just how bad the credit implosion really is. And the injection of that money is simply to maintain the AAA ratings. But in my view those companies, with or without the added capital do NOT deserve to have a AAA rating. The whole ratings agency situation is a disgrace.

An interesting bit of history came to mind and I looked it up last night. In the book "The Smartest Guys in the Room" , by Bethany McLean & Peter Elkind there is a section that talks about Enron and the ratings agencies. A passage from the book:

In a January 29, 2000 presentation that Enron gave to Moody’s and Standard & Poor’s, one of the slides in the presentation said"

"The number one reason (that Enron deserves a high credit rating) is that it is critical to the maintenance and growth of its existing dominant market share business" (Translation: It’s important to us; therefore we should have it.)

It’s not unusual for companies to meet with the credit-rating agencies. What was unusual is the extent to which Enron saw the agencies as just another part of the system it could game. Agency analysts have certain criteria they use to measure a company’s health, ratios such as cash flow to interest expense and total debt compared with total assets. If a ratio was in balance, it was easy for the analysts to simply check it off and move on to the next one. In fact, a big part of the reason Enron used structured finance was to show the credit analysts the ratios they wanted to see. And if the analysts didn’t ask precisely the right question to get under the smooth surface, well, then, Enron wasn’t about to give a meaningful answer.

After the collapse of Enron, the ratings agencies, which came under fire for giving them a high credit rating while the company was collapsing from within said in testimony "Enron duped them" and claimed that they were not aware of the extent of the off balance sheet debt.

My point in bringing this up here is that the ratings agencies are obviously having their arms twisted by the companies themselves and the Government for the sole purpose of keeping that AAA rating. But what will this AAA rating do (if maintained)? It will allow the losses to be bled out slowly instead all at once. It is clear that the soap opera that is taking place behind closed doors with these ratings agencies and the bond insurers is nothing more than an attempt to disguise the extent of troubles and let it bleed slowly, where maybe people will not notice it so much. This soap opera will continue for a long time to come.

Now where are we on the charts? The charts below show our current stance.

 

 

 

 

 

 

 

 

 

(S&P 500 Daily chart)

 

 

 

 

 

 

 

 

 

 

(S&P 500 60 minute chart)