• Choose a category
• All
• Classic-Fiction

11 “Shorting Bond Insurers for Charity,” New York Times DealBook, dealbook.blogs .nytimes.com, 28 November 2007.

12 Janet Tavakoli, “Dicey Deals Done Dirt Cheap,” Tavakoli Structured Finance, Inc., 3 January 2008. No model is required to grasp the problem. In December 2007, Standard & Poor’s stress test estimated that monoline financial guarantors have $10.7 billion in potential aggregate losses, but S&P’s stress case for losses was below my base case. S&P assumed stress case losses of only 15.5 percent. For 2006 vintage first lien subprime loans, I used a 30 percent default rate and a 70 percent loss rate. My net base case losses were 21 percent. Moody’s base case used an 11 percent loss assumption for 2006 vintage first lien subprime loans. Moody’s stress case loss of 19 percent for subprime loans was near my base case of 21 percent and well below my stress case of 30 percent for 2006 originated subprime loans. To achieve the triple-A (Aaa) rating, Moody’s looks for an insurer with capital equal to 130 percent times base case losses and 100 percent times stress case losses. Using my base case assumptions for subprime losses and Moody’s base case capital criteria, five of the seven triple-A-rated financial guarantors did not merit their high ratings. In the late 1990s, when CapMAC Holdings Inc., was in trouble (CapMAC merged with MBIA in 1998), it was given a minimal grace period to raise capital before losing its top rating; there was no kidding around. But now the rating agencies reeked of desperation. Several bond insurers were given more than a month to raise more money. Moody’s had nearly 90,000 politically charged public finance deals on negative watch for downgrades—due to the potential downgrades of two of the smaller bond insurers (FGIC and XL) alone.

13 Ibid. In December 2007, Standard & Poor’s affirmed the ratings for Ambac Assurance Corp, CFIG’s entities, MBIA Insurance Corp., and Security Capital Assurance (XL Capital Assurance Inc. and XL Financial Assurance Ltd. (XL)) with a negative outlook. Financial Guaranty Insurance Corporation (FGIC) was rated AAA but was on negative watch. ACA Financial Guaranty Corp. had been recently downgraded from A to CCC with CreditWatch Developing, but the downgrade was long overdue. Moody’s put the triple-A ratings of FGIC and XL on review for possible downgrade. It affirmed the triple-A ratings of MBIA and CIFG, but with a negative outlook. Financial Guaranty Insurance Corporation (FGIC), MBIA Inc. (MBIA) and Security Capital Assurance (XL Capital Assurance Inc. and XL Financial Assurance Ltd. (XL) merited immediate multi-notch—in some cases multigrade—downgrades. Ambac Financial Group Inc. (Ambac) and CIFG were stronger yet not sufficiently strong to merit the triple-A rating, and only Financial Security Assurance Inc. (FSA), and Assured Guaranty Corp. (AGC) seemed eligible to retain a “triple-A” rating (based on subprime exposure). Unfortunately, the latter two were relatively small (with FSA being the larger) so the problems of the larger players had a huge market impact. Stress test scenarios were even worse. If one considered that an increase in capital cushion might also be required to support other business lines, the situation was desperate. Canadian Imperial Bank of Commerce (CIBC) had already announced $2 billion in write-downs, and Merrill had billions more related to ACA.

14 Becky Quick, Janet Tavakoli, David Kotok, “Backing up the Bond,” CNBC, January 7, 2008 (video segment).

15 Ibid.

16 Ibid.

17 Saskia Scholtes, “MBIA in $1bn Deal to Retain Rating” Financial Times, 11 January 2008.

18 Janet Tavakoli, Matthew Fabian, Charles Gasparino, “Bond Insurance: The Bigger Problem,” Squawk Box, CNBC, 25 January 2008.

19 Ibid.

20 Ibid.

21 Liz Rappaport and Serena Ng, “Bond Insurers Inflict Further Pain on Market,” Wall Street Journal, 21 June 2008. By the end of June 2008, formerly triple-A bond insurers FGIC, CFIG and XL were all below investment grade, and MBIA and Ambac lost