{"id":9626,"date":"2015-07-02T06:06:46","date_gmt":"2015-07-02T11:06:46","guid":{"rendered":"http:\/\/olduvai.ca\/?p=9626"},"modified":"2015-07-02T06:06:46","modified_gmt":"2015-07-02T11:06:46","slug":"will-puerto-rico-cause-an-inadvertent-black-swan-derivatives-melt-down","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=9626","title":{"rendered":"Will Puerto Rico Cause An Inadvertent \u201cBlack Swan\u201d Derivatives Melt-Down?"},"content":{"rendered":"<h3 class=\"entry-title\"><a href=\"http:\/\/investmentresearchdynamics.com\/will-puerto-rico-cause-an-inadvertent-black-swan-derivatives-melt-down\/\" target=\"_blank\">Will Puerto Rico Cause An Inadvertent \u201cBlack Swan\u201d Derivatives Melt-Down?<\/a><\/h3>\n<p>I really had not been paying much attention to the Puerto Rico debt situation. \u00a0After all, $72 billion in debt that might go bad \u2013 big deal. \u00a0The Fed can print up $72 billion in credit lines with the push of a button.<\/p>\n<p>But a friend of mine happened to mention to me today (Monday) that MBIA\u2019s stock was down over 23% and Assured Guaranty\u2019s stock was down over 13%. \u00a0That woke me up.<\/p>\n<p><a href=\"http:\/\/investmentresearchdynamics.com\/wp-content\/uploads\/2015\/06\/MBIA.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignleft  wp-image-6216\" src=\"http:\/\/investmentresearchdynamics.com\/wp-content\/uploads\/2015\/06\/MBIA-300x188.png\" alt=\"MBIA\" width=\"433\" height=\"271\" \/><\/a>MBI guarantees $4.5 billion in par amount of Puerto Rico muni paper. \u00a0As of it\u2019s latest 10-Q (March 31, 2015), MBI showed a book value of $3.9 billion.\u00a0<strong>Puerto Rico alone could more than wipe out MBI\u2019s net worth.\u00a0<\/strong>\u00a0But that\u2019s only a portion of the story. The bigger part of the story is buried off-balance sheet in the footnotes in opaque financial structures called Variable Interest Entities (VIE\u2019s). Remember those from 2008? \u00a0I remember them vividly.<\/p>\n<p>The VIEs are the off-balance sheet vehicles that triggered the massive chain of counterparty defaults\u00a0which\u00a0de facto collapsed the U.S. financial system in 2008. \u00a0The VIEs are where the credit default swaps and other nebulous forms of OTC derivatives bet slither around.<\/p>\n<p>Companies like MBI and AMBAC underwrite\u00a0 credit \u201cenhancement\u201d guarantees\u00a0on these\u00a0massive cesspools of debt \u2013 and the associated derivatives that are\u00a0\u201cwrapped around\u201d the debt structures \u2013 and stick them in VIEs. \u00a0MBI\u2019s 10-K has several pages of footnotes which vaguely describe the contents of its VIEs. \u00a0 The problem is that MBI and its ilk are thinly capitalized relative to the potential size of the liabilities they face if the credit markets become volatile to the downside.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"http:\/\/investmentresearchdynamics.com\/wp-content\/uploads\/2015\/06\/mushroomcloud1.png\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter  wp-image-6218\" src=\"http:\/\/investmentresearchdynamics.com\/wp-content\/uploads\/2015\/06\/mushroomcloud1.png\" alt=\"mushroomcloud1\" width=\"469\" height=\"254\" \/><\/a><\/p>\n<p><strong>Toxicity plus toxicity does not equal purification. \u00a0But VIEs that contain off-balance sheet debt and derivative guaranteed equals\u00a0toxicity cubed, at least. \u00a0 In other words, whatever MBI lists as its \u201cnet\u201d credit exposure in its financials, take that number and, at the very least, triple it.<\/strong><\/p>\n<div>\n<p>&#8230;click on the above link to read the rest of the article&#8230;<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Will Puerto Rico Cause An Inadvertent \u201cBlack Swan\u201d Derivatives Melt-Down? I really had not been paying much attention to the Puerto Rico debt situation. \u00a0After all, $72 billion in debt that might go bad \u2013 big deal. \u00a0The Fed can print up $72 billion in credit lines with the push of a button. But a [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[6893,195,200,916,1849,374,6895,503,6894,647,3824,6585,6896],"class_list":["post-9626","post","type-post","status-publish","format-standard","hentry","category-economics","tag-black-swans","tag-debt","tag-default","tag-financial-collapse","tag-financial-markets","tag-gold","tag-investment-research-dynamics","tag-market-manipulation","tag-mbia","tag-precious-metals","tag-puerto-rico","tag-stock-bubble","tag-u-s-economy"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/9626","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=9626"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/9626\/revisions"}],"predecessor-version":[{"id":9627,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/9626\/revisions\/9627"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9626"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9626"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9626"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}