Bill Laggner on valuation traps

MBIA, the municipal bond insurer, looks cheap at 11x earnings and 1.4 x book value, but when you look at the balance sheet, which very few people look at today, you see that it’s levered 94 to 1. The statutory capital that they keep on hand is 3.5 basis points of their bond guarantees. Compare that to Citigroup, which has almost 9.5 basis points of reserves. Ten years ago just 14% of MBIA’s business came from structured finance guarantees on asset backed securities. Today that number is 32%. Of course the structured finance world is all based on numerous assumptions, including stable interest rates and low default rates. We would say that those are very generous assumptions.

~ "Value Traps Revisited," Dollarcollapse.com, December 21, 2007

Bill Ackman on the bond insurance industry

There's not likely to be a man left standing [in the bond insurance industry.] This thing is over already, the market just doesn't know it yet.

~ Bill Ackman, 42, runs the $6 billion Pershing Square Capital Management hedge fund, "Ackman Foresaw MBIA Drop, Is Short Financial Security," Bloomberg, June 19, 2008, by Christine Richard

Rating agency ratings of MBIA and Ambac miles apart from ratings implied by credit default swap market

Ambac and MBIA have raised billions of dollars of new capital so that Moody's and Standard & Poor's would keep top ratings for the bond insurers -- and the rating firms have done just that.
Moody's implied-ratings group paints a completely different picture. Using the CDS market, [David] Munves's [Moody's Analytics] unit rates both MBIA and Ambac Caa1. That's seven notches below junk and 15 below the official Moody's rating.

Swap traders see there's a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don't trust S&P's and Moody's investment-grade ratings for the companies.

"The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default,'' says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC.

The rating companies say their grades are correct.

~ David Munves, managing director for credit strategy research at Moody's Analytics, "Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk," Bloomberg.com, May 30, 2008

Mish on the ratings agencies reaffirming AAA ratings for Ambac and MBIA

In a widely expected move, the S&P proved they have an iron stomach for gall and/or a nose that cannot distinguish horse hockey from a rose. Today the S&P Affirmed The AAA Rating Of Insurers MBIA, Ambac Ratings.

Standard & Poor's reaffirmed the Triple A rating on the two biggest bond insurers, MBIA and Ambac Financial Group, sparking a rally by both stocks and the market in general. S&P ended its downgrade review for MBIA's (MBI) Triple A rating, citing success by the largest U.S. bond insurer in raising new capital.

The action reflects the company's ability to successfully access $2.6 billion in extra capital that can be used to pay claims, S&P said in a statement. The outlook is negative, indicating a rating cut may still be likely over the next two years.

The "AAA" ratings of Ambac (ABK) were affirmed but remain on review for downgrade. A group of banks has largely finalized a deal to recapitalize Ambac and is now trying to sell the plan to the rating agencies to save Ambac's triple-A rating, CNBC has learned.

S&P's affirming of Ambac doesn't take into account the recapitalization plan, but the review will continue until details of the plan are clearer.

A tentative structure for up to $3 billion in capital for Ambac has been agreed to by the consortium, which includes Citigroup (C)and Wachovia (WB). The banks are trying to save Ambac, as well as other bond insurers, because a ratings downgrade could force the banks to write down billions more of their own debt.

Citing ability to raise $3 billion in capital (a deal that is not even finalized), and in the face of monolines holding $70-$150 billion of worthless CDOs, the S&P held its nose and confirmed horse hockey smells like a rose.

~ Mike "Mish" Shedlock, "S&P Sniffs Horse Hockey, Calls It a Rose," Mish's Global Economic Trend Analysis, February 25, 2008

Minyanville on what happens when the monoline insurers can't pay claims

A hurricane comes through your town and levels your house. A few weeks later, you receive a letter from your insurance company telling you that unless you buy some of its stock, it won’t be able to pay your insurance claim. What do you do?

As far fetched as this question may feel, this is, in principle, what’s behind the bailout of the monoline insurance companies. Unless their biggest CDS counterparties step up with more capital, the insurance companies won’t be able to make good on their CDS and the banks will be forced to take write-downs.

~ Minyanville.com, "Insurers' Day of Reckoning," February 25, 2008

XL Capital Assurance on the beneficial role of the bond insurers in the CDO market (2002)

Monoline insurers not only benefit the investors and sponsors of CDOs but are often the key to the successful execution of innovative transactions... Monoline insurers have the resources, expertise, and financial wherewithal to understand underlying assets, conduct due diligence, provide feedback to the structuring institutions, interact with rating agencies and work for long periods on newer and more innovative transaction structures.

~ Iftikhar Hyder, XL Capital Assurance Inc., "Collateralised Debt Obligations and the Role of Monoline Insurers," September 24, 2002

XL Capital Assurance on the importance of diversification to the performance of CDOs

Although CDOs are now 14 or so years old, structural innovation continues unabated and more innovation usually translates into more involvement by the monoline insurers. While it is important to have a strong structure, perhaps nothing helps a CDO transaction, or a portfolio of CDO investments, more than diversification. The best of managers cannot consistently beat the market or avoid defaults. Many CDO investors know that concentrations are little more than expensive wagers. If there is one lesson to be learnt from the performance of CDOs of various cohorts and types, it is this: Diversify.

This lesson has not been lost on the monolines.

~ Iftikhar Hyder, XL Capital Assurance Inc., "Collateralised Debt Obligations and the Role of Monoline Insurers," September 24, 2002

Jon Markman on the prospect of the bond insurers losing their AAA credit rating

[T]he consequences of a downgrade of the monoline insurers if they were still responsible for guaranteeing muni debt would be too catastrophic to even contemplate... the monolines basically rent out their AAA rating to municipalities in exchange for insurance premiums. So a downgrade of the monolines' ratings would in turn mean a downgrade of the munis. Due to contract covenants that require munis to hold high ratings, a downgrade would in a great many cases require cities and states to buy back much of their trillions of dollars of debt from buyers -- which would be impossible -- and force them into bankruptcy or into enormous tax increases to pay for higher interest rates.

~ Jon Markman, "Buffett's an opportunitst, not a hero," MSN.Money, February 15, 2008

Bernanke closely monitoring bond insurers

Given the adverse effects that problems of financial guarantors can have on financial markets and the economy, we are closely monitoring developments. In addition, we are closely monitoring the potential effect of downgrades of financial guarantors on bank holding companies, state member banks, and other institutions supervised by the Federal Reserve. We believe we have the appropriate tools to assess exposures to bond insurers of the banks that we supervise.

~ Fed Chairman Ben Bernanke, "Fed Closely Monitoring Bond Insurers," Bloomberg, February 6, 2008

Morgan Stanley on MBIA's structured finance disclosure

We are shocked that management withheld this information for as long as it did. This new disclosure completely changes our view of MBIA being a more conservative underwriter relative to Ambac.

~ Ken Zerbe, Yoana Koleva, Morgan Stanley analysts, "MBIA details huge mortgage exposure, shares collapse ", Reuters, December 20, 2007