Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [100]
The smarter investment banks were alarmed. If push came to shove, bond insurers might use fraud as an excuse to avoid payments, or the bond insurers might try to nullify contracts.That would mean billions of dollars of losses for the investment banks.
On January 25, 2008, I told CNBC’s Joe Kernen that the underwriters (not the rating agencies) are responsible for doing due diligence, and Danillo raised the issue of insurance and fraud. The investment banks might have to take the loans back on balance sheet, and they took Danillo very seriously.
Charlie Gasparino asserted the rating agencies are the “culprit.”18 I responded that blaming rating agencies without mentioning the role of the underwriters is incorrect, since investment banks buy and sell the securities and are obliged to do due diligence.
Dinallo, Gasparino said, “is probably hiding under his desk,” and that “what he did is completely irresponsible,” referring to the bailout plan. He added that Dinallo “has a little explaining to do.”19 But Matt Fabian of Municipal Market Advisors observed that investment banks and rating agency interests are aligned, and “the bailout plan is a pretty obvious one.”20 Fabian said the investment banks must have a problem coming up with the money.
The investment banks struggled to hold off a wave of write-downs and were dismayed by the prospect of coming up with money to help the bond insurers.The banks were worried that the bond insurers would figure out a way to get out of the contracts and all of that risk would come right back on the investment banks’ balance sheets.
By the end of June 2008, MBIA and Ambac lost their AAA ratings and three other bond insurers had been downgraded from AAA to junk (below investment grade).21 Some bond insurers sued, others investigated options to nullify contracts. But they left it too late. The bond insurers have been damaged and investment bank took more losses as they took risk back on their balance sheets. The fights will go on for years. Eric Dinallo is not the one with a little explaining to do.
Strong municipalities do not need guarantees from bond insurers. Besides, the guarantees are worse than worthless. In many cases, municipal bonds can get a strong investment grade rating on their own merits. During the summer of 2008, municipalities worthy of a single-A rating on their own merits—and many merited higher ratings—found their bonds would trade more easily without the guarantee. As of September 2008, the municipal bond market remained in a state of flux as Moody’s announced that in about a month hence it would change the way it assigns ratings to tax-exempt borrowers. This would result in higher ratings for many municipalities, but of course, this is not an actual upgrade in quality; it is merely a relabeling.22 By the time this book is published there may be more clarity and consistency in municipal bond ratings, but until there is, the confusion may make it more difficult for municipalities to predict their borrowing costs.
When we first met, I told Warren that I am an avid Benjamin Franklin fan and have read his short autobiography several times.Warren looked at me as if I were pulling his leg. He handed me a copy of Poor Charlie’s Almanack—Vice-Chairman of Berkshire Hathaway and longtime friend Charlie Munger’s self-styled finance homage to Franklin. Munger is also a great admirer of Benjamin Franklin, the statesman, philosopher, author, founder of the first North American library, publisher and inventor. Those are reasons enough for admiration,