Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [135]
2 Traditionally, the main line of business of monoline insurance companies, or monolines, was to provide bond insurance. Bond insurers (or monolines) provided credit wraps, which are financial guarantees, and under New York law, home of the largest U.S. investment banks, monolines are the only entities allowed to provide financial guarantees. Many of the bond insurers bought subprime-related CDOs including, in some cases, risky CDO-squared products.
3 Michael McDonald,“Auction-Bond Failures Deplete New Hampshire Fund,” Bloomberg News, 17 March 2008.
4 Darrell Preston, “Banks Say Auction-Rate Investors Can’t Have Money,” Bloomberg News, 6 June, 2008.
5 Michael McDonald, “UBS E-Mails Show Conflicts With Auction-Rate Customers in Suit,” Bloomberg News, 27 June 2008.
6 Karen Freifield and Michael McDonald, “Morgan, JPMorgan Settle Auction-Rate Probe, Pay Fines,” Bloomberg News, 14 August 2008.
7 David Scheer and Karen Freifeld, “Citigroup to Unfreeze $19.5 Billion of Auction Debt,” Bloomberg News, 7 August 2008. Closed end funds issued preferred auction-rate securities which were not included in these buy-back settlements.
8 Robert Frank and Liz Rappaport, “Big Boys Face ‘Auction’ Monster Alone,” Wall Street Journal, 29 August 2008.
9 Moody’s Investors Service, Global Credit Research Announcement:, Moody’s Announces Rating Actions on Financial Guarantors, 14 December 2007. Moody’s had a stable outlook when it affirmed the ratings of Ambac (Aaa). Fitch placed the AAA ratings of Ambac, MBIA, and FGIC on review for possible downgrade. XL Capital Assurance was put under review, and Fitch said it needed to raise $2 billion. Fitch indicated Ambac and MBIA would be cut to AA+.
10 Aaron Lucchetti, “CDO Battles: Royal Pain Over Who Gets What,” Wall Street Journal, 17 December 2007. Analysts seemed to have just noticed details like unwind triggers, including market value triggers for shaky structured investment vehicles (SIVs) that issued short-term debt to fund risky longer-term higher yielding assets—similar to Countrywide’s problem in August, but the Fed was not bailing out the structured investment vehicles. For example, in November 2007, MBIA Inc., the largest bond insurer, sold assets to bond-holders of its Hudson Thames Capital SIV. It wound down from $2 billion to $400 million after announcing that it had failed to find investors since August in the asset-backed commercial debt issued by this vehicle. MBIA waged a legal battle with Deutsche Bank, Wachovia Corp., and UBS over the cash flows of Sagittarius CDO I, a constellation CDO. In November 2007, it triggered an event of default leading to an unwind. MBIA seemed to think it had a traditional deal entitling it to the remaining cash flows—did it ever read a prospectus? LaCrosse Financial Products LLC, an MBIA affiliate, had done a credit derivatives transaction on the seniormost tranche. The unnecessarily complicated prospectus language made it difficult for the trustee to determine which investor had payment priority. As was typical of these deals, there is an interest-only class. If the deal went into liquidation as other CDOs had done, the fight could be over less cash. On December 17, 2007, I told the Wall Street Journal:“If you liquidate a lot of assets at once, you don’t always get the best price.” More than that, the structure disadvantaged naïve senior note-holders. The equity holder seemed to benefit at their expense. The equity is like the blow and burn in the arms trade, the detonator of whatever you are pedaling. It marks you as a pro, since you can profit even when a deal goes bad, and this CDO was scheduled for a meltdown