TMI On PMI

Closer to home (pun intended) is the bankruptcy or receivership of PMI.  It is almost hard to believe that they raised over $475 in an equity offering just last April.  I don’t expect any material consequences in the CDS markets as it wasn’t in many indices (just the recent HY ones I believe) and it was at least partially priced in – though it was offered at 55 on Tuesday morning and is now 73 bid.  According to DTCC there is about 37 billion of gross notional and 1.8 billion of net notional  (about 50% of what Greece has according to DTCC).

The likely impact is going to be from US banks that were still treating PMI as “money good” on their books.  That fiction will have to end.  I suspect, just like in Europe, the strongest banks here will have already discounted any PMI insurance that was in their mortgage portfolios and the weakest banks will have pretended it was still worth a lot.  This could impact the mortgage market and add to weakness we have seen over the past couple of weeks.

On Thursday, PMI Dec. 2011 CDS was offered at 10 points.  It is now trading at 70 points.  So much for efficient markets.  So far, the markets are strong enough on the back of the upcoming European bazooka, that it isn’t impacting the strength in even the index which PMI is a member of, but still seems like it is worth paying attention to since the market clearly underestimated the timing of default.