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Zero Hedge
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15 апреля 2011, 18:27

It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Bankings Crisis

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I’m fresh back from my trip to Amsterdam where I lectured ING institutional clients and staff on the potential of a European banking collapse. Below are a few clips from the first of two lectures. Now that the mainstream media has been reporting what BoomBustBloggers knew as fact as far back as two years ago. Today, the FT printed an article titled “Greek debt hit by restructuring fears“, whose pertinent points are as follows: The euro tumbled on Thursday and premiums charged on Greek debt over Germany’s hit euro-era highs after the countries’ respective finance ministers talked of Greece needing more time and raised the prospect of debt restructuring. In an interview with the Financial Times, George Papaconstantinou said Greece needed more time to convince international investors of its commitment to reform its finances. Separately, Wolfgang Schauble, Germany’s finance minister, told Die Welt newspaper that, if a study already under way showed Greece’s debt levels were unsustainable, “further measures” would have to be taken. When asked what those could be, he ruled out any involuntary restructuring before 2013, but warned investors could face losses after that point…  Yields on Greek two-year bonds jumped nearly a full percentage point to 17.884 per cent. … “Greek bonds are getting crushed today due to the comments from the German finance minister and the Greek equivalent,” said Gary Jenkins, head of fixed income at Evolution Securities. “The European Stability Mechanism allows a roadmap towards restructuring, indeed it insists upon it if debt cannot be restored to a sustainable path.” Investors… flight left yields on equivalent Greek debt 24bp higher at 13.162 per cent while Portuguese 10-year notes yielded 8.88 per cent, up 14bp. Mr Jenkins said investors expected that any restructuring would start with Greece trying to extend repayment deadlines on existing debt, or asking investors to “forgive” interest on the loans. But he warned it could take more than that. “Ultimately we believe that if the idea is to get the debt back to a sustainable level then the target will be the Maastricht treaty limit of debt-to-GDP of 60 per cent. In order to reach that level bonds will have to take a haircut of some 62 per cent,” he said. Online Spreadsheets (professional and institutional subscribers only) Greek Default Restructuring Scenario AnalysisGreek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and HaircutsPortugal’s Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy – Professional AnalysisThe Spain Sovereign Debt Haircut Analysis for Professional/Institutional SubscribersIreland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and HaircutsThis is the professional addendum to the  Sovereign Debt Exposure of European Insurers and Reinsurers (439.61 kB 2010-05-19 01:56:52) can be found online here: Insurer and Reinsurer Sovereign Debt Exposure Worksheets – Professional Professional and institutional subscribers should feel free to look at a variety of haircut scenarios via out proprietary sensitivity analysis for the Greek head grooming. If you remember last year when  illustrated How Greece Killed Its Own Banks!, you realize the main reason why the EU has been using the kids gloves with the Greeks. To make a long story short, let’s employ the old adage “A picture is worth a 1,000 words”… Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)… The same hypothetical leveraged positions expressed as a percentage gain or loss… When I first started writing this post this morning, the only other bond markets getting hit were Portugal’s. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following: Leveraged European Entities from a Sovereign Risk Perspective – retail Leveraged European Entities from a Sovereign Risk Perspective – professional If you think those charts look painful, imagine if the Maastricht treaty was actually respected. Our models haven’t pushed passed 80% debt to GDP, but if you were to put the treaty’s debt ceiling in you would see the very definition of contagion. The following chart represents the first order consequences of a 62% haircut on Greek debt…

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15 апреля 2011, 18:16

Gold Celebrates Complete Lack Of Inflation By Surging To New Record

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On one hand we have the BLS telling us core inflation declined to a ludicrous 0.1%, on the other hand Charles Plosser just had a soundbite, captured for posterity, that "high oil prices don't cause inflation", but luckily confirming there is someone not taking crazy pills, is the third hand, which takes gold to a new all time high of $1,481.46. We wonder, of the three hands, which one is right...

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15 апреля 2011, 18:05

Consumer Confidence Improves As 1 Year Inflation Expectation Remains At 2 Year High

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Once again confirming that sentiment indicators are completely irrelevant and thoroughly misleading at best, we have the UMichigan consumer sentiment coming out at 69.6 compared to expectations of 68.8 and up from the March 67.5 print. This number is a rather stark contrast to the recently highlighted Gallup consumer confidence which plunged to August 2010 levels. And looking at current economic conditions index confirms that since 2010 the economy has gone precisely nowhere. But most notably, 1 year inflation expectations are still at the highest since 2008 at 4.6 unchanged M/M. All that of course is irrelevant as the algos just scanned the headline and go batshit, lifting every offer with gusto. 

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15 апреля 2011, 17:46

Goldman's Take On Industrial Production: Volatility Blamed On Abnormal February Heat

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From Goldman: "US industrial production increased by 0.8% mom in March, up from a revised 0.1% increase previously. In February, unseasonably warm temperature reduced heating demand and therefore output of utilities. This held back the gain in overall production despite growth elsewhere. This effect reversed in March, leading to strong growth in the index." So between snow, rain, heat, earthquakes, nuclear explosions, oil spills, all of which are of course completely unforeseeable, why do we need economists making "forecasts" again?From Jan Haztius, who is desperately seeking the best way to break the news about the GDP growth cut.MAIN POINTS:1. US industrial production increased by 0.8% mom in March, up from a revised 0.1% increase previously. In February, unseasonably warm temperature reduced heating demand and therefore output of utilities. This held back the gain in overall production despite growth elsewhere. This effect reversed in March, leading to strong growth in the index.2. Beyond this temporary noise, industrial activity remained quite strong. Output of manufactured products increased by 0.7% mom in March, reflecting gains in both motor vehicle output and other items. Over the last four months, the industrial production index for manufactured products increased by an annualized rate of 9.9% - the fastest four-month pace of increase since the recovery began. In coming months, we will be watching closely for the effect of any supply-chain disruptions resulting from the natural disasters in Japan. But heading into this potential shock, momentum in the sector looks strong.3. The capacity utilization rate increased to 77.4% in March from 76.9% in February. The level was in line with consensus expectations - despite higher production growth overall - due to revisions to earlier months.

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15 апреля 2011, 17:34

With Greek Bonds In Freefall, ECB Intervention Absence Raises Concerns Greece Is Now Doomed

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It seems that the ECB has now resigned to letting Greece fail. While previously any time we had a whopping 2 point drop in one day the ECB would promptly step in and be the buyer of only recourse in peripheral debt, it has been deathly silent today. And as the chart below demonstrates Greek debt is about to go bidless: a par 10 Year note is trading at 62, with the resulting yield now literally going parabolic. And the 2 Year is now at 16.5%. Luckily for a globalized economy, dominoes are completely isolated and what now appears to be a certain "chain reaction" in creditor defaults will have no impact on the Russell 2000: after all the Fed is surely prepared for this contingency.  

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15 апреля 2011, 17:20

China Net Seller Of US Treasurys For Fourth Consecutive Month

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While we will present a comprehensive update of the just released TIC data shortly, the one chart worth noting is the sequentual change in holdings by foreign countries, and particularly one of them. Importantly, of the 4 largest holders of US debt, China, Japan, the UK and Oil Exporters, the latter 3 all saw an increase in their Treasury holdings, China continues selling Treasurys, with a 4th consecutive decline in its total holdings. That said, since TIC data is notoriously flawed and always incorrect, with at least half UK purchases being attributed to China post annual revisions (nobody knows who is responsible for the other half) it could well turn out that China was the only country actually buying US paper. We won't know for sure for at least a year from now following the next full year revision. And by then it likely won't matter.Source: TIC

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15 апреля 2011, 16:44

The Only Chart That Matters From Today's Empire Manufacturing Index

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The Empire Manufacturing Index came out at 21.70, on expectations of 17.00, reversing the recent downward trend seen in other diffusion indices. The full release is here. The only chart, however, that matters is the following: Prices Paid.From the report:Price Increases Continue to Pick UpPrice increases continued to accelerate in April. The prices paid index moved higher for a fifth month in a row, increasing 4 points to 57.7, with 60 percent of respondents reporting higher prices over the month. The prices received index advanced 6 points, to 26.9, its highest level since mid-2008. Employment indexes were positive, indicating that employment levels and hours worked rose. The index for number of employees climbed an impressive 14 points to 23.1, and the average workweek index fell 5 points to 10.3.

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15 апреля 2011, 16:36

CPI Comes At 0.5%, Ex-Food And Energy 0.1%, Below Expectations, QE3 Door Still Open

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And again we learn from the Department of Truth that core inflation is non-existent. Of course, this number is not applicable to anyone who actually has to buy things. According to the BLS CPI came in line with expectations, and unchanged from last month, at 0.5%. CPI ex food and energy of 0.1% actually declined from last month's 0.2%, and was below consensus of 0.2%. From the release: "The Consumer Price Index for All Urban Consumers (CPI-U) increased  0.5 percent in March on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment.  Gasoline and food prices continued to rise and together accounted for  almost three quarters of the seasonally adjusted all items increase in March. The gasoline index posted its ninth consecutive increase and has now risen 14.4 percent over the last three months. The household energy index rose as well, with advances in the fuel oil and electricity indexes more than offsetting a decline in the index for natural gas. The food at home index continued to accelerate in March, rising 1.1 percent as all six major grocery store food groups increased." What this means is that core CPI will likely not get high enough to derail the option for QE3 if and when it comes around some time in Q3.  Still the trend is rather obvious:Focusing on food and energy:FoodThe food index rose 0.8 percent in March after rising 0.6 percent in February. The food at home index increased 1.1 percent in March and has risen 2.7 percent over the past three months. All six major grocery store food groups increased in March, with increases ranging from 0.5 percent for cereals and bakery products to 1.9 percent for fruits and vegetables. Within the fruits and vegetables component, the fresh vegetables index rose 4.7 percent in March after a 6.7 percent increase in February, as indexes for potatoes, lettuce, and tomatoes all posted significant increases. The index for dairy and related products increased 1.3 percent, while the index for meats, poultry, fish, and eggs rose 1.1 percent. The index for nonalcoholic beverages increased 0.8 percent as the coffee index climbed 3.5 percent. Over the past 12 months, the index for food at home has risen 3.6 percent with the index for meats, poultry, fish and eggs up 7.9 percent. The index for food away from home increased 0.3 percent in March, its largest increase since September, and has risen 1.9 percent over the past 12 months. EnergyThe energy index rose 3.5 percent in March after increasing 3.4 percent in February. It has increased for nine months in a row, rising 23.7 percent since June 2010. The gasoline index rose 5.6 percent in March after a 4.7 percent increase in February. (Before seasonal adjustment, gasoline prices rose 11.7 percent in March.) The index for household energy advanced 0.6 percent in March after a 1.3 percent increase in February. The fuel oil index rose 6.2 percent and has increased 37.2 percent in the last six months. The index for electricity increased 0.7 percent in March, while the index for natural gas declined 1.4 percent. The household energy index has risen 1.2 percent over the last 12 months, with the fuel oil index up 34.0 percent and the electricity index up 1.0 percent but the index for natural gas down 5.5 percent.

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15 апреля 2011, 16:28

There Goes The Greekberhood: German Europe Minister Says Would Back Greek Restructuring

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Greek 10 Year-Bund spreads just passed 1,000 for the first time ever and were last trading north. Following this statement from Germany's Hoyer, it seems all hell is about to break loose for peripheral spreads.*GERMANY WOULD BACK VOLUNTARY GREEK RESTRUCTURING, HOYER SAYS*GREEK DEFICIT CUTTING MAY NOT BE ENOUGH, HOYER SAYS*GERMANY ‘WORRIED’ ABOUT GREEK FISCAL DEVELOPMENTS, HOYER SAYS*GREEK DEBT RESTRUCTURING `WOULD NOT BE A DISASTER,' HOYER SAYS*GERMAN EUROPE MINISTER HOYER SPEAKS IN INTERVIEW IN BERLIN 

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15 апреля 2011, 16:26

FX Implications Of A High CPI From Citi

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If Citi is right, and it is, and CPI comes high, and it will, looks for some fireworks in FX following the announcement of CPI in 5 minutes: "Market is most sensitive to core CPI reading as that is the Fed's target (at least the Fed majority's). Consensus and Citi are at 0.2%m/m  on core, but there are many more at 0.1% than at 0.3%.  Given how yields have moved in recent days the pain is on an 0.3% m/m rather than an 0.1%. The 0.3% would probably cause fear that the Fed will raise rates sooner rather than later while the 0.1% would be in line with a Fed hick in 2012. High core CPI would be a risk off event but USDJPY would see some upside support. If equities sell off it would be an added USD positive, since market is short USD and long risk, and rates unwind would lead to USD-supportive position cutting. On headline expectations very much in 0.4/0.5% range. A big overshoot on headline and core at expected 0.2% would probably have a modest and possibly temporary affect on US rates."And some more views on the AUD and EUR following last night's surging Chinese inflation numbers, again from Citi:The Chinese GDP data suggested that the economy expanded by 9.7% inQ1, more than market expectation of 9.4%. The CPI release further indicated that headline inflation intensified by more as well to 5.4% - the highest level in three years.The fairly upbeat Chinese GDP data failed to spark a renewed enthusiasm for risky assets. Asian stock markets, commodity prices and G10 currencies like AUD and EUR came under slight downside pressure following the release. One reason for that could be that the real news in the data was the fact that the Chinese headline inflation continued accelerating despite the repeated measures to contain its rise. Part of the market reaction thus reflects concerns that further inflation acceleration will be met with (potentially excessive) monetary tightening, which could slow down future growth. The above conclusion seems to be confirmed by the slight upward correction in CNY NDF rates on the back of the release highlighting market expectations that the appreciation of the Yuan could slow going forward. The fact that the Chinese reserves grew to a record in Q1 also seem consistent with the view that the Chinese authorities will continue actively working against further pronounced gains in their currency for now. If investors’ concerns about the potential negative impact of inflation on growth EM Asia intensify this could erode some of the support for currencies of export driven economies like AUD and, indeed, EUR in coming months. Commodity block currency should be impacted as well since a (temporary) slowdown in the main growth center of the global economy could weigh on the commodity prices. Importantly, under this scenario, the support for liquid dollar alternatives like EUR and AUD coming from USD-recycling could ease as well due to diminished need for EM Central Bank intervention if the market pressure on their currencies to appreciate against USD comes to a temporary halt.

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15 апреля 2011, 16:14

Frontrunning: April 15

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Wheels Turning to Create New Silk Road (China Daily)Banks, SEC in talks to settle mortgage charges (Reuters)Qaddafi Taunts West as NATO Seeks More Attack Planes (Bloomberg)Fears Grow Over Greek Debt Default Despite Bail-out (Telegraph)Broke U.S. States’ $48 Billion Debt Drives Unemployment Aid Cuts (Bloomberg)Moody’s Cuts Ireland Rating Two Levels, Outlook Negative (Bloomberg)Irish Warning to EU of ‘Spoke in Wheel’ of Growth (FT)G-20 Faces Need to Heed Criticism as Stronger IMF Voice Sought (Bloomberg)G-20's Efforts on Growth Stall (WSJ)Losing 84 Cents on Dollar Reveals Runaway U.S. Public Pensions (Bloomberg)Outlook Uncertain, G20 to Target Imbalances (Reuters)China Reserves Exceed $3 Trillion as Wen Resists Yuan Pressure (Bloomberg)Yoon Says South Korea Price Pressures to Ease as Further Steps Are Weighed (Bloomberg)Congress Approves Spending Bill With $38.5 Billion Cut (Bloomberg)Renewable Energy Investment Drops 34% to Lowest in Two Years (Bloomberg)Event highlights from Egan Jones:Asian stocks fall as China inflation exceeds forecast; Gold, Oil pare gain.China economy grows more-than-forecast 9.7% as prices surge most since '08.Congress approves US Spending Bill with $38.5B cut.Consumer confidence in US rose for a third straight week as improving job prospects.Gold surges to record as global inflation concern stokes increased demand.Greece to unveil new austerity steps to meet deficit goals as yields soar.IMF rebukes may go ignored by G-20 seeking tougher economy policy watchdog.Japan's Noda says he will call for continued currency cooperation at G-7.OECD’s Gurria says reforms are needed for world to avert 'mediocre' decade.Alcatel mulls corporate telecom gear unit sale - reportAmetek increases earnings estimates.Bank of America's March earnings decline from $3.2B to $2.2B.Blackstone’s Vanguard Health Systems is said to prepare initial share sale.Chinese internet stocks have valuation risks, ex-Google Country Head says.Citigroup to raise $273M by selling 12M shares in Primerica.Cubist Pharmaceuticals posted Q1 EPS of $0.55/sh, beating avg estimate by 19%.Disney gets a second chance in China with $4.4B Shanghai theme park.Google reported Q1 net that missed cons estimates on higher hiring, marketing expenses.GSK to sell non-prescription diet pill Alli along with a clutch of other OTC brands.Hasbro's Q1 net fell 71% on higher product development costs, game sales declines.Hyundai, Kia’s US car factories run overtime as Toyota pares production.ICBC’s Jiang says economic expansion to keep driving down bad-loan ratios.Isovoltaic cancels $548M IPO as debt woes trump solar Japan rally.Mattel 1Q net income fell to $16.6 million due to high costs.Nasdaq hires Bank of America’s Shavel as CFO amid bid for NYSE Euronext.StanCorp Fincl sees Q1 EPS of not more than $0.77/sh vs. cons f'cast of $1.19.Supervalu reported a 2.1% drop in ne ton continued weaker sales.Valmont posts Q1 EPS of $0.97 (cons $0.95); revs up 55% at $568.0M.European Economic Highlights:Euro-Zone CPI - Core for March 1.3% y/y - higher than expected.Consensus 1.1%. y/y. Previous 1.0% y/y.Euro-Zone CPI for March 1.4% m/m 2.7% y/y – higher than expected.Consensus 1.3% m/m 2.6% y/y. Previous 0.4% m/m 2.6% y/y.Euro-Zone Trade Balance sa for February -2.4B – higher than expected.Consensus -3.6B. Previous -3.1B.Euro-Zone Trade Balance for February -1.5B – higher than expected.Consensus -4.0B. Previous -15.6B.Italy Trade Balance (Total) (Euros) for February -3633M.Previous -6599M.Italy Trade Balance Eu (Euros) for February -883M.Previous -831M.Italy CPI - EU Harmonized for March 2.2% m/m 2.8% y/y – higher than expected.Consensus 2.0% m/m 2.6% y/y. Previous 2.0% m/m 2.6% y/y.Italy CPI (NIC incl. tobacco) for March 0.4% 2.5% y/y – in line with expectations.Previous 0.4% m/m 2.5% y/y.Norway Trade Balance (Krone) for March 32.b – higher than expected.Consensus 30.8B. Previous 30.8B.Sweden Average House Prices (SEK) for March 2.035M.Previous 2.141M.

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15 апреля 2011, 15:57

Bank of America Provisions $1 Billion For Reps & Warranties Liability In Q1 As Claims Jump By $2.9 Billion, Pays Monoline AGO $1.1 Billion To Settle

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Bank of America continues crawling along the razor's edge, with the biggest threat to its continued business model: ongoing legacy CFC fraud being largely unprovisioned for. In the just released earnings presentation, we learn that the bank provisioned only $1 billion for its ongoing Reps and Warranties liability, after charging off a minuscule $238 million - the lowest in over a year, bringing its total liability accrual to $6.2 billion. Yet over the same period total outstanding claims by counterparty surged by nearly 30%, from $10.7 billion to $13.6 billion, primarily due to GSEs, although the steady putback rise in monoline GSE claims is relentless (and appears to have gotten to the bank considering the just announced Assured Guaranty settlement, see below). Total outstanding claims at the end of Q1 totalled $13.6 billion. Also someone please explain to us how Merrill Lynch (see footnote 2) is one of the parties responsible for filing new claims against its parent and rescuer Bank of America. As for a real world example of just what the real cost of these liabilities is in a full discharge scenario, we have the just announce settlement with Assured Guaranty which cost the company $1.1 billion to settle loss-sharing reinsurance arrangement on 21 first lien RMBS transactions totalling $4.8 billion net par. In other words the settlements that are about to be announce with MBIA and other monolines could possibly be in the double digits, crushing BAC's earnings in whatever quarter they are announced. Fom BofA's commentary on the topic:1Q11 reps and warranties provision of $1.0B is $3.1B lower than 4Q10, as that quarter included a $3.0B provision related to the agreements with GSEsOutstanding claims increased $2.9B. The increase in the outstanding GSE claims is primarily attributed to an increase in new claims submitted on both Countrywide originations not covered by the GSE agreements and Bank of America originations compared to 4Q10, combined with an increase in the volume of claims appealed by the company and awaiting review and response from the GSEsRescissions and approvals in 4Q10 were primarily driven by GSE agreementsIt should not be forgotten that with the taxpayer funded GSEs being the biggest variable in whether or not BAC is insolvent, it was none other than former Bank of America General Counsel Tim Mayopoulos who is currently GC at Fannie, and decided to recuse himself from the settlement which whacked so much in potential reps and warranties claims. One continues to wonder what Tim's award for betraying taxpayers was in this case.As for a real world example of just what the real cost of these liabilities is in a full discharge scenario, we have the just announce settelement with Assured Guaranty which cost the company $1.1 billion to settle loss-sharing reinsurance arrangement on 21 first lien RMBS transactions totallying $4.8 billion net par. In other words the settlements that are about to be announce with MBIA and other monolines could possibly be in the double digits.From the AGO release Assured Guaranty Ltd. (NYSE:AGO - News) (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”) announced today that it has reached a comprehensive settlement with Bank of America Corporation and its subsidiaries (collectively, “Bank of America”), including Countrywide Financial Corporation and its subsidiaries (collectively, “Countrywide”), regarding their liabilities with respect to 29 residential mortgage-backed securities (“RMBS”) transactions insured by Assured Guaranty, including claims relating to reimbursement for breaches of representations and warranties (“R&W”) and historical loan servicing issues.The settlement agreement includes a payment of $1.1 billion to Assured Guaranty as well as a loss-sharing reinsurance arrangement on 21 first lien RMBS transactions. The settlement covers all Bank of America or Countrywide-sponsored securitizations, as well as certain other securitizations containing concentrations of Countrywide-originated loans, that Assured Guaranty has insured on a primary basis. The settled transactions have a gross par outstanding of $5.2 billion ($4.8 billion net par outstanding) as of December 31, 2010, or 29% of Assured Guaranty’s total below investment grade RMBS net par outstanding, and consists of 8 second lien securitizations and 21 first lien securitizations.“We are pleased to have reached a settlement with Bank of America that puts this legacy issue behind both of us,” said Dominic Frederico, President and Chief Executive Officer. “This settlement significantly strengthens our balance sheet, allowing us to more effectively assist municipal issuers. We hope that this settlement—negotiated outside of litigation—encourages other R&W providers including JPMorgan Chase, Deutsche Bank and Flagstar Bank to accelerate the R&W claims settlement process.”The cash settlement of $1.1 billion will be paid in full by March 31, 2012. The initial payment of $850 million was paid on April 14, 2011. In addition, Bank of America and Countrywide have agreed to a reinsurance arrangement that will reimburse Assured Guaranty for 80% of all paid losses on the 21 first lien RMBS transactions until aggregate collateral losses in those transactions exceed $6.6 billion. Cumulative collateral losses on these transactions were approximately $1.3 billion with no paid losses by Assured Guaranty as of December 31, 2010. As of December 31, 2010, Assured Guaranty’s gross economic loss on these RMBS transactions, which assumes cumulative projected collateral losses of $4.6 billion, was $490 million. The total estimated value of the settlement is expected to be accretive to shareholders’ equity and adjusted book value, a non-GAAP financial measure.