Macroeconomics – Page 102

Fannie, Freddie, and the Financing Methods of Last Resort

Posted on 8 July 2008 by David Merkel

Ugh.? I’m still not home yet, but after my recent 48-hour news blackout, the news on Fannie and Freddie is pretty amazing.? Now, I would not be so certain that an interpretation of SFAS 140 would force Fannie or Freddie to raise capital — GAAP accounting often has little to do with regulatory capital rules.? Only if OFHEO decides to mimic the treatment in GAAP would it force capital-raising, absent any net worth covenants on their debt that might be poorly written.

All that said, the problems with Fannie and Freddie are not primarily accounting-driven, but are being driven by diminishing housing prices, which erodes their margin of safety on their lending and loan guarantees, and diminishes the value of the mortgage insurance that they rely on for some of their business.? Writedowns from these items are what hurt.? It is likely that Fannie and Freddie need to raise capital, but the great questions are how much is needed, and how much can the market stomach?

At times like this, I run through my pecking order of the “financing methods of last resort.”

Have you maxed out trust preferred obligations? Other subordinated debt?
Have you maxed out preferred stock?
Have you issued convertible debt to monetize volatility?
Have you diluted your equity through secondary IPOs, rights offerings, PIPEs, and/or deals with strategic investors?
Have you sounded out investors in your corporate bonds about debt-for equity swaps?
And, unique to Fannie and Freddie, have you asked the US government for a capital infusion or a debt guarantee?

All of these financing methods carry a cost.? (And, as with most situations like this — if it were done, best it should be done quickly.? Delay usually means that cost of financing rises.)? Most of the cost is dilution to existing shareholders, whether common or preferred.? The debt guarantee, or investment by the government has costs for the US taxpayer, which I would rather not see.

Clearly, Fannie and Freddie have room to raise more capital, but the room is not unlimited.? As the Financial Guarantors found, when your stock price gets too low, the jig is up.? You can only raise so much capital relative to the size of your current market capitalization before the market chokes.? After all, most capital raising requires a discount to current price levels, and somehow the diluted value of the equity needs to represent a premium price where new capital gets put in.

In short: it’s tough to get new investors to pay for past losses.? Capitalize a new company?? Could be done, and has already happened with the Financial Guarantors, which has largely sealed the fate of the tarnished incumbents.? That said, why would the US government want a competitor to Fannie or Freddie, aside from GNMA?

As for the US Government, perhaps this all waits for a new President and Congress to act.? Personally, I think that any help extended to Fannie or Freddie should have strings attached.? Investments, or debt guarantees should allow the US government to profit if things turn around.? Other things to explore: only guaranteeing new liabilities, or, expanding the role of GNMA, which is a full-faith-and-credit of the US Government lender.

The one thing I don’t want to see is a bailout that benefits the shareholders of Fannie or Freddie.? They have long had private profits with many public subsidies for years.? Now it is time for the shareholders to bear the losses; let public money only step in to keep senior obligations whole, if it steps in at all.

(Note: these are my private opinions, and not those of my employer.)

We Need Economic Stimulus, And We Need It Now!

Posted on 1 July 2008 by David Merkel

It is a wondrous thing to be the global reserve currency.? We can run government deficits of any size that we want, and the rest of the world gets to fund us by buying our debt.? Thus, when I look at calls for still greater stimulus (through Government spending and borrowing) from men like Bill Gross, Larry Summers, and Bob Shiller, I just groan.? When does the rest of the world say “Enough!”, particularly the Persian Gulf States and other oil exporters who don’t have as much of an economic reason to support the US Dollar, because they don’t have to promote exports to the rest of the world.? But, perhaps for political reasons, they keep buying US debts.

This will not end well; the only questions are when, and how severe?? On this issue, I’m not sure it matters who the next president is, because the US no longer independently controls its own destiny.? (Great question for the debates: “Sir, what will you do as President to strengthen the Dolllar’s position as the global reserve currency?”? I would expect the intelligent equivalent of a stutter.)? The main barrier is that there is no good replacement for the Dollar as the global reserve currency.? The Euro could still fail; large-scale monetary unions need to be political unions for them to succeed in the long run.? The rest of the currencies are too small, or their banking systems insufficiently liberalized.

But, maybe the world could live without a single reserve currency.? Currencies could compete against each other, and gold, and other commodities.? This is an age of computers; I’m not sure why there would have to be one standard of value, particularly, when the standard of value varies so much.

I’m still away on vacation, so I may not post a lot until I am back on July 8th.? I did do a trade today; I bought some Smithfield Foods (rebalancing buy).? I suspect they will export a lot more as time goes on, and perhaps one their new major owners agrees.? After all, China’s staple meat is pork, and Smithfield is a high-quality provider.? This is just another way that I consider global demand, rather than local demand.

Bringing this piece full circle, perhaps China found a better way to recycle dollars; at least this investment brings home the bacon.

Full disclosure: long SFD

Rethinking Comparable Worth

Posted on 21 June 200822 June 2008 by David Merkel

“Comparable Worth” was a faddish idea for economic leftists that flowered (thankfully it was brief) in the 1990s.? The idea was that you could measure occupations on a technical basis, measuring education, effort, responsibility, and other aspects of the job, and figure out what occupations should be compensated similarly.

That’s a pretty difficult problem to solve in the absence of markets.? Granted, there are some Human Resources (what a phrase) consulting firms that have models in narrow contexts to try to solve salary questions inside similar corporations, but the consultants true up their models to the markets regularly, and are covering a more narrow range of jobs.

I want to muse about a different kind of comparable worth this evening, one that many Americans (and others in “developed nations”) might not like.? It is my guess that we are seeing the slow erosion of wage differentials across developing and developed countries, particularly for goods and services that are part of global trade.

Now, I am not saying that an unskilled auto worker in China will earn as much as a non-union auto worker in the US, which is backed by more capital investment, and requires a smarter worker.? I am also not saying that unionized workers in developed countries won’t earn more.? The viability of the firms their unions serve may be compromised, though.? What I am saying is that global corporations can choose where they produce goods, and on a productivity- and quality-adjusted basis they will use laborers that give them the best deal.

As for jobs that are internal to an economy, such as working at a retail store, the adjustment will be slower.? Internal job wage differentials across countries depend on the overall wage differentials across countries.? As overall wage differentials narrow, so would internal job wage differentials.

Also, given how many commodities are priced globally, and those have become a more important part of the cost structure recently (though the effect is not that bad if one takes a long-term view… increased productivity means we use less commodities to achieve the same ends as 40 years ago), the factor share going to labor in developed countries is probably being squeezed a little.? So, what does this imply for workers in the US and the developed world?

As the rest of the world develops, their living standards will slowly converge with those in the US.? They will demand a greater share of the world’s resources in the process, making the affluent life more expensive.? This will in turn drive more technological innovation to make commodities stretch further.

Now, perhaps some will say that the solution is to cut off or limit free trade.? That won’t work.? The US is so dependent on free-ish trade that any significant reduction of trade would drive inflation up in the US.? Beyond that, the US benefits from its reserve currency status.? Where else does a country get goods and services, and hand over bonds denominated in their own currency?? What a sweet deal for the present — an inflationary pity when it ends.

I started out my career with a goal of being a development economist, and doing work in the Third World.? That ended when I learned that the models used by the development economists did not work, and that capitalism and free trade did work.? When the developing world began to make great strides after the end of the Cold War, I was happy.? I’m still happy about it today; poverty is slowly but steadily being eliminated across a wide swath of the globe, and that is a good thing for most.? But to many Americans (and others in develop nations) who are finding themselves out-competed by foreign competition, this is not a happy time.

Be aware of the global competitive position of your industry, and adjust your career accordingly.? Build up your own ability to deliver special (hard to duplicate) value for your employer and work where your personal competitive advantage is maximized.? That’s not easy, but the easy path probably embeds a future that is less well off.

Inflation and Stocks

Posted on 19 June 200819 June 2008 by David Merkel

I read this article today, and it made me want to write on the topic.? This is a concept that I learned early in my investment career.? It is worth understanding, so that you can do better in investing.? Inflation is negative for stocks, but it is a small negative — for every 1% that the inflation rate goes up, stocks decline 2% on average.

That’s not very big.? So why do stock investors panic over inflation?? They panic because the Fed might respond to inflation, and raise real (inflation-adjusted) interest rates enough to quell inflation.? Rises in real interest rates are far more negative to the market — a 1% rise in real rates hurts the equity market by 10%.? Why such a big impact?

The impact is large, because when real interest rates are high, capital is scarce.? Go back to my “Fed Model” article which is very different from other “Fed Models.”? High corporate bond rates raise interest costs for corporations, reducing profits, and raising discount rates (cost of equity capital).

At present, real interst rates are negative — in nominal dollar terms, this is not a bad time to own stocks.? Think of the dividend discount model for a moment.? Inflation runs through earnings and the discount rate, so the effect is muted.? Real rates run through the discount rate only — poison.

Is there any hope in an era where inflation is rising, and where real rates may rise?? Value investing always offers some hope, but that’s not my main point here.? Inflation manifests itself differently in different eras.? Look for the areas that are in short supply.? They will be the areas where corporations will have pricing power.? Those areas will outperform the market, even if the market as a whole declines.? At present, I am looking at energy stocks, food stocks, and others.

Inflation is bad for the market, but don’t let that stand in the way of looking for what might offer relative profit in this environment.

Ten Notes on Residential Housing

Posted on 18 June 200818 June 2008 by David Merkel

I’m waiting for the day when I can write upbeat stuff about housing…? when I can buy homebuilder and mortgage stocks and crow about my gains.? I hope I live two more years. ;)? (Many thanks to Calculated Risk for their excellent coverage of residential housing.)

1) The first thing to note is that residential real estate values are still falling nationwide.? That affects Mortgage Equity Withdrawal [MEW] and derivatively, consumption.

2) Now, housing prices are likely to fall another 10-15%, which is what I have been saying for a while.? That will lead to more situations where there is negative equity, and more defaults, as they happen with negative equity and negative life events.

3) Foreclosures are making up a larger percentage of all sales, which is not a positive in the short run for prices.? In Sacramento, and some other places in California, foreclosures are the majority of sales.? As a result, it is no surprise that housing sales are at a low.? Foreclosures have risen rapidly across the country, not boding well for future sale prices.? Even in Florida, foreclosures are gumming up the market, and are getting reconciled slowly.

4) The GSEs are in a tough spot.? The government pushes them to make suboptimal loans that their shareholders don’t like.? I guess that’s a part of their deal.? As it is, the GSEs are playing a large role in many loans today.? Private capital doesn’t step up in an environment like this.

5) Labor mobility is limited when housing prices fall.? Pretty normal, if infrequent, in my opinion.? I faced this back in 1989; employers offered limited housing perks to new hires.? In three years, this will be gone.

6) Now, it should be no surprise for lending standards to tighten now.? We always shut the barn doors after the cows are in the fields.

7) Mortgage rates are rising, largely due to the reaction of the bond market to Fed chatter.

8 ) Prime ARMs will fuel the next wave of delinquencies.? If home values fall enough, any class of lending is vulnerable.

9) It should not surprise us that housing starts are low in an environment like this.? The bigger the boom, the bigger the bust.

10) I am not generally a Tom Brown fan.? He is too perma-bullish for my tastes.? He may have a correct technical point on subprime losses, but it may misrepresent losses for the financial sector as a whole.? Subprime is small.? Alt-A and Prime are much bigger, and losses are growing there.

The Bottom for the Banks

Posted on 14 June 200815 June 2008 by David Merkel

There are many people calling for a bottom to banking stocks, and I must admit, it is a tempting place to play. I never thought Fifth Third would trade so low. Or Keycorp. Royal Bank of Scotland, sorry, I sold you early in 2008; yes, I thought you would fall. When does the excessive leverage finally eliminate the CEO?

Here’s the challenge for investors: on the one hand, you have declining earnings per share in the near term, from losses and capital raises. But when have equity prices fallen enough to discount the future losses?

I am being cautious here. I own no banks.

Here’s another way to think about it — after all of the bad debts are written off, and bad banks eliminated, what kind of earnings stream will be attractive?

I’ll use the homebuilders as an example here — at troughs, they sometimes trade for half of written-down book value, The question becomes the final side of the book value after the writedowns.

I would still be cautious here, but markets are discounting mechanisms — we are getting closer to a bottom in the banks; we are not there yet.

Ten Notes on Crude Oil: The Fixation

Posted on 14 June 200815 June 2008 by David Merkel

In different economic eras, different things attract the attention of the media, investors, politicians, etc.? Today a leading attention grabber would be crude oil, and the energy complex.? It is a honeypot for conspiracy theorists and unscrupulous politicians (not quite an oxymoron).

1)? Fuel is subsidized across much of the world, particularly in countries where there is a large state owned oil company.? Current high prices are making it difficult to maintain those subsidies, so countries like Egypt and Indonesia are reducing subsidies.? Yet subsidies are not being eliminated everywhere yet.

2) Speculators — perhaps they need a new name, and a branding campaign.? Risk bearers, maybe.? I don’t know.? But discouraging speculation by raising margin requirements will not necessarily decrease the cost of crude — those who are short crude also face margin requirements.

Now, many commodities have no futures contracts.? On average their prices have increased more than those that have futures contracts recently. ? That indicates to me that those that have futures contracts are not in a bubble.

Some look at the dollar change in prices and think that speculation must be high.? Bespoke does a good job in breaking it down into percentage terms, which indicates that the oil market has been more volatile more than half a dozen times in the past.

Do speculators include the ordinary shmoes like you and me who use ETFs?? I’ve used currency and stock and bond index ETFs, but not commodities so far.? Amazing how the trading interest on commodities has grown through ETFs — here’s another good chart from Bespoke.

As I have commented before, I think the run-up in the price of oil is fundamental, not manipulation.? Ignore the futures, and just look at spot prices — it is hard to affect where the real buyers and sellers trade in a global commodity.? If prices get too high, like the last move of OPEC in the 1979, where they overshot, and supply eventually overwhelmed their too high price.

3) We could be in overshoot mode now; it’s hard to tell.? As I have said before, sustained high prices are necessary to create the investment in alternative technologies that save energy and produce energy
more cheaply.? I don’t think that it will happen quickly though… in the early 80s, oil prices edged down, and then came down rapidly in the mid-80s.? It took a while for the new supply to be developed, and for conserving technologies to be created and deployed.

If you want a current example, think of the new big oil field found off the coast of Brazil.? It will be three years or so until we see new production there.? Another example is that it is hard to ramp up additional production from existing fields.? If you try to force more oil out more rapidly than is prudent, you can destroy the long-term viability of the oil fields.

4) But, there are dissenting voices, whether wishful ones like this one from a Japanese Vice Minister, or this article from Fortune which is more nuanced.? His arguments sound like mine, but on a faster timetable, with less consideration for future depletion.? This article from the Dallas Fed is similar; though it says that it will be difficult for oil to stay over $100/barrel in 2008 dollars, they have a ten-year horizon on that forecast.? Hey, even I think that oil will drop below $100/barrel within 10 years.

5) Now, there is demand destruction.? We are already seeing it in the UK.? We are not seeing it in China, yet.? Part of the difference has to do with China subsidizing gasoline, which blunts the market effect.

From this article, within a year gasoline demand is pretty inflexible with respect to price.? Beyond one year, people adjust their behavior.

And, it is worth noting that OPEC thinks demand in the US and globally is shrinking.? They are probably right, though the effect on price is problematic, because many oil producers can’t produce what the used to — Mexico, Venezuela, Indonesia…

6) Now, this article indicates that changes in demand for oil have been more significant than changes in supply.? Whether that will be true in the future remains to be seen, but as the rest of the world gets better off, they will demand more energy.? A wealthy life is energy-intensive.

7) Inventories are light compared to average, but I’m not sure that is as big of a factor as many indicate.? At the edges when inventory is close to capacity, or when it is close to running out, that has a big impact, but in the middle zone, the impact should be modest.

8) When I read this summary of a speech by Donald Kohn, I concluded a few things:

The Fed is stuck.
Because the Fed is stuck, it will let things drift for a while.
A certain amount of idealism is waning inside the Fed, with a creeping suspicion that they aren’t wizards, but only sorcerer’s apprentices.

9) It has been a long term theme of mine that the oil that is easiest to refine would get relatively more scarce.? This article from Naked Capitalism is another demonstration of that.? And, for those who want a stock pick, that favors Valero, which can refine the heavy and sour crudes.

10) A large part of the US current account deficit is the increase in the price of crude oil.? Eventually, the decline in the US Dollar will stimulate exports, but for a while, the J-curve effect remains in place, and the Dollar takes a beating.? That beating isn’t happening at this instant, but it has gotten hit over the past several years.? I’m not sure that this recent rise is the reversal, but there will come a time when the current account normalizes.? Hopefully other nations will liberalize trade; that would do it in its own.

Full disclosure: long VLO

PS — I am market weight in energy stocks.

Book Review: The Wall Street Waltz

Posted on 13 June 200813 June 2008 by David Merkel

I’ve mentioned this before at RealMoney, but in early 2000, I was doing some serious thinking about investing. I decided to e-mail Ken Fisher a question that he had touched on in one of his Forbes pieces. That began an e-mail dialog that forced me to ask hard questions about how I did value investing. Personally, I was surprised how much time he was willing to waste on me, but I had read the three books that he had written up to that time, Super Stocks, 100 Minds that Made the Market, and The Wall Street Waltz. I had a good idea of how he approached investing.

He challenged me to throw away the CFA Syllabus and think independently — to focus on my own competitive advantage. That led me to analyze what had worked and failed in my prior efforts in value investing, and that led to what would become the Eight Rules. I did well in the prior era, but much better after my discussion with Ken Fisher.

One more note before I begin the book review. He told me that if something is known, it is not valuable for investing. I have modified that rule to be, “If something true is relied upon by many investors, it is not valuable for smart investors. If something false is relied upon by many investors, it is valuable for smart investors to bet against that.”

The Wall Street Waltz takes you on a graphic tour of economic and financial history. Using beautiful old charts created by multiple sources, he uses them to describe market action in the past, and what they might imply for the present. The original version, of which I have a copy, was written in 1987. The new edition updates Ken’s comments to 2007.

The charts provide a springboard for Fisher to explain a wide number of concepts:

Why preferred stocks are suboptimal investments. (Chart 31 — learned that first hand a a little kid as I saw my Litton convertible preferred crater.)
How economically linked Canada is to the US (Chart 15)
The value of P/E ratios for the market (Charts 1&2)
Why you shouldn’t panic over bad political/disaster news. (Chart 24)
How inflation is correlated internationally (Chart 49)
Gold preserves purchasing power in the long run, but that is about it. (Chart 57)
Stocks create value in the long run, despite short/intermediate-term fluctuations. (Chart 88)

I could go on. I chose those pages randomly. There is a wealth of knowledge here. I would like to close with a timely page that I targeted, Chart 64 — Unemployment and the 1 Percent Rule. The stock market tends to rally after the unemployment rate rises 1%, though the challenge is timing when to sell, and I don’t know what the rule should be for that. After the last unemployment report, the rate is more than 1% over the recent low. If correct, it is time to be a buyer, though what is true on average is not always true in specific.

Most investors don’t benefit from an understanding of economic history, which gives a broader skill set for analyzing current problems. This book is an aid in gaining understanding of economic history.

Full disclosure: If anyone enters Amazon through my site and buys something, I get a small commission. Your costs are not increased. This is my equivalent of the “tip jar” and so, if you like what I write, and need to buy through Amazon, please enter Amazon through links on my site.

As The Yield Curve Moves

Posted on 13 June 2008 by David Merkel

My, but haven’t we had interesting times in the short end of the yield curve lately. Have a look at this graph:

This covers the period from the final aggressive 75 basis point move by the FOMC, where there were expectations of a 1% fed funds rate by year end 2008, to now, where the rate at year end is between 2.5-3.0%.? Now look at this chart, which summarizes the yield curve moves:

The graphs and numbers tell a story.? My four datapoints represent:

3/17 – The sharpest point in the loosening cycle, prior to going to 2.25%.
4/25 – Anticipation of the end of the loosening cycle.
6/6 – FOMC jawboning that we must support the dollar and fight inflation.
6/12 – Now.

Let’s describe the moves, period by period.? In Period 1, the transition was from maximum FOMC accomodation to the end of the loosening cycle.? What happened?? Investors required more yield to invest for two years versus cash instruments, because they concluded that short rates would not go near record low levels.? The long end of the curve flattened, because inflation expectations were under control.

In period 2, things were quiet.? Three month rates rose to reflect the new consensus that the FOMC was on hold after the 4/30 meeting for the foreseeable future.? The rest of the curve did nothing.

In period 3, members of the FOMC began beating the inflation drum, particularly the hawks, including Plosser, Lacker, Fisher, and Bernanke.? The belly of the curve (twos to fives) rises the most, anticipating tightening moves by the FOMC, leading the long end to flatten, and the short end to steepen.? This implies that inflation will remain under control in the long run, an idea borne out by the TIPS market, where you can buy 20+ year inflation protection at a real yield of 2.3% — a pretty good bargain for investors that must own Treasuries and other high quality debt.

I’ll give the FOMC this.? In the last four trading days, they helped create the biggest move in the 2-year note yield that we have seen in a long time.? They managed to push up 30-year mortgage yields around 35 basis points, close to the move in the 10-year note.

Now, (to the FOMC) is that what you wanted?? Go ahead.? Start tightening monetary policy in August or September.? See what that does to the investment and commercial banks.? See how that affects weakening employment.? Do it during an election year, when politicians in 2009 might say, “Central bank independence hasn’t helped the nation.? Let’s clip the wings of the Fed.”

I see the FOMC tightening, and then abandoning the tightening early, and reverting to a weak policy, accepting more inflation for the sake of growth in the real economy, and leniency to banks that are facing tough market conditions.

Monoline Malaise

Posted on 12 June 200812 June 2008 by David Merkel

Yves Smith at Naked Capitalism had a good post on the financial guarantors. It dealt with MBIA’s new refusal to make a capital contribution to its subsidiaries. Here’s the company’s take on the matter. And here was my comment at her (Yves’) blog:

David Merkel said…: Were I Dinallo, I would refuse to allow them to set up a new monoline. He has that authority for his own state. I might also take the existing companies into conservation. Then, let MBIA take their spare capital and try to set up a monoline in another state.The commissioners of the other states should refuse them as well, because they mismanaged an insurance company already. They are supposed to check these things when new insurance companies are formed.

Finally, I’m not sure how much good $1.1 billion will do them — If you look at the 2007 10K (page 161), and wipe out their investment in subsidiaries, and take the first quarter $2.4 Billion loss out… let them have the $1.1 Billion, their net worth is still negative.

Now, maybe the loss is at the subsidiaries, so their net worth at the holding company would be near zero. That would still cause them to violate the minimum net worth covenant on their bank debt, if they lost control of their subsidiaries.

The banks could force repayment, and if I were a leading bondholder (calling the major life insurers), I would have one of my lawyers make a courtesy call to MBIA’s lawyers, and suggest that any payment of bonuses could be viewed as fraudulent conveyance.

MBIA is in a bad enough spot, that I don’t see what good keeping the $1.1 billion does them in the long run. Thus, it has to be a short-term gambit.

June 11, 2008 5:56 PM

No, they didn’t promise to shareholders or bondholders that they would do it. It was only their intent.
But, they probably did make promises to the rating agencies and NY State insurance Commisioner Dinallo.

If I were in the shoes of the ratings agencies, not downstreaming the capital is worth at least another two notches in terms of downgrades. Can the management be trusted? Probably not, which calls into question all the non-verifiable data that they have from MBIA.

If I were in the shoes of Dinallo, I would not allow MBIA to support just one of its insurance companies. I would ask for the $1.1 billion to be contributed so that risk based capital ratios at the subsidiaries would be close to even.

Now, another analyst suggested that MBIA and Ambac should be junk rated. The idea here is that once a financial guarantor goes bad, it is likely that things are even worse. That is supported by the past behavior of the rating agencies and Moody’s own implied ratings as well.

Now, things could be worse. They are worse for Security Capital Assurance, which could not wriggle off the hook of their obligations to Merrill Lynch. This has negative implications on similar efforts of other insurers to not pay as promised. Even XL Capital, which owns a large portion of SCA, and has guarantees on parts of SCA’s business that was not part of the Merrill suit, fell. It fell because:

the value of their SCA stake fell
The value of their guarantees to SCA rose; harder to repudiate.
General malaise across all financial guarantors.

As a final note, the leverage that MBIA and Ambac had with respect to their market shares has evaporated with the regulators and the rating agencies. Who knows, maybe even with their GAAP auditors… The need to support MBIA and Ambac was greater when the alternatives were fewer, but when you have Berky, Assured Guaranty (give ACE some credit for discipline here), Dexia/FSA, and maybe other new entrants, you can turn your back on everyone else as a regulator. You don’t care about the exotic coverages, and you’re glad they are going away — you just have to clean up the mess. As for the rating agencies, they have reconciled themselves to the idea that all but the municipal enhancement business is dead. So, say goodbye to MBIA and Ambac writing new business. That is over.