Wednesday, January 30, 2008

Carnage in the bond insurance markets

Reading Bloomberg after work is becoming an interesting hobby and schradenfreude generator as the monoline insurance companies are swirling ever faster around the drain:

Fitch today downgraded Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, two levels to AA from AAA, after the company failed to raise capital. Earlier this month, Fitch also cut Ambac Assurance Corp. to AA from AAA, and Hamilton, Bermuda-based Security Capital Assurance Ltd.'s XL Capital Assurance and XL Financial Assurance five steps to A.

There are rumors floating that MBIA and Ambac, the two largest insurers will soon be downgraded. A hedge fund principal, who is short on monolines, is arguing that Ambac and MBIA are hiding four or five times their stated losses at the moment and could be exposed to even more risk than they are stating:

MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, may each lose $11.6 billion on guarantees of mortgage-linked debt and other securities, according to hedge fund manager William Ackman.

The losses were calculated using a model supplied by an unnamed investment bank, and the findings were sent in a letter to the Securities and Exchange Commission and New York Insurance Superintendent.....Ambac said Jan. 22 it expects to pay claims on CDOs of $1.1 billion. MBIA said Jan. 9 it will likely report a $737 million expense for the fourth quarter to cover losses related to deteriorating subprime-mortgage securities it guarantees. MBIA is scheduled today to report its fourth-quarter results after the close of regular U.S. equity trading

Another analyst in the same article hits the information uncertainty nail on the head as one of the big problems companies have been having is that no one knows what things are worth due to a combination of illiquid markets, financial chicanary and piss poor underwriting.

``If we had the same level of data on every deal, we wouldn't have a problem,'' said Christopher Whalen, managing director of Institutional Risk Analytics, which makes software for banks. ``The data would be ground up, the losses would be known and we'd have a functioning market again.''

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