Friday, August 8, 2008

One email comment - about reserving at MTG

The GAAP reserving rules for mortgage insurers are very strange - almost prohibiting them taking reserves for anticipated defaults (except the premium deficiency reserve).

I might be harsh saying that they are under-reserved in a GAAP sense. I do not think I am harsh saying MTG is under-reserved according to common sense accounting. But I am open to being convinced otherwise.



Anonymous said...

there are no insolvent institutions in america. heed the authorities. they proved they will do anything to prevent it. if i'd short these i would focus on liquidity problems not solvency, and it's a bit early now. the tsunami is coming in about 3 months time. everyone who held tooth and nail for the 2nd spring season in a row will have thrown the towel by now. and banks need to pony up.

John Hempton said...

Anon here - and I wish people would give a "name" so I didn't get my anon's confused - has a point.

Mostly I am worried about liquidity NOT solvency. It is unusual for me to want to make a solvency short.

I am a reluctant short in MTG - and like most my positions - it petrifies me...


bowdo said...


good to hear someone expressing doubts about their investments.

So different from most of the people you read or see on tv that act like they are 100% sure they are right at all times.

John Hempton said...

I have found when I am most sure I tend to lose money. The old slogan is "often wrong, never in doubt".

I have decided to NEVER let that happen to me again. (That is very difficult and expensive intellectually.)

But the real surprise of the blog. I get a lot of email. Most of it is wrong/misguided/misinformed just like most market speculation - but just as often there is someone who genuinely knows far more about something than I can hope to - and has the detail that will convince me I am wrong.

I would write the blog just for these people if I could find them...


Me said...


Could you please clarify the distintion you intend to convey by the term "insolvent" vis-a-vis "illiquid".

I am an English lawyer and in merry old England an entity that is illiquid (i.e. is unable to pay its debts as they fall due) is legally insolvent. An entity can also be insolvent if it has an excess of liabilities over assets. Perhaps when you use "insolvent", you are referring exclusively to the latter?



John Hempton said...

To the English language lawyer. Financial institutions fold for one of two reasons

(a) they simply run out of cash. that is they are ILLIQUID.

(b). the regulator takes them over even though they have cash because the do not have enough regulatory capital (ie they are INSOLVENT).

It is possible to be illiquid - but still solvent. And if you wind up such a firm or inject additional liquidity it will have value. Its unlikely that this happens - but it is not unknown. The Norwegian government made a profit on its bank bail out because the firms were illiquid but still had assets.


As an investor in things that can go bankrupt you need to be more concerned with liquidity than solvency.

Liquidity causes crises. Bear Stearns literally ran out of money. There was a "run". We will not know for years whether it was solvent. But it was illiquid and that was the end. Shareholders were stuffed.

The lawyers tend to confuse because they talk about being able to pay debts when they fall due - rather than having enough resources to pay all their debts when they fall due.


I guess if I were to give a lawyers distinction illiquid is not having cash to pay debts now. Insolvent is not having enough capital to be reasonably sure that you can pay debts when they fall due.

Sorry if I use these in banking art terms not legal terms. The same legal distinction arises in Australia - and it annoys the hell out of me.


simmoj said...


Its the English lawyer here again.

An institution you call ILLIQUID, we call CASH FLOW INSOLVENT.

An institution you call INSOLVENT, we call BALANCE SHEET INSOLVENT. Well, actually, you're not talking about balance sheet insolvency because apparently the regulator would intervene in the case of a financial institution before it got to that point.

Maybe that will help diffuse your frustration next time you're talking to an Australian lawyer?

Kind regards,


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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.