Read it here first: CDO Lust Undercut AAA Success

Last week, we discussed the foolish shift among the monolines from staid Bond insurers to derivative dab blers in Counter-Party Risk.

Now Bloomberg has picked up the same meme:

"Municipal bond insurers such as MBIA Inc. and Ambac Financial Group Inc. had a good thing going.

For years, they earned some of the highest profit margins in any industry — by writing coverage for securities sold by states and cities to build roads, schools and firehouses. During the past five years, MBIA’s average profit margin was 39 percent, more than four times the average of the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Ambac’s average profit margin was 48 percent.

The good times are over, and the culprit isn’t municipal bonds; it’s subprime debt, a market the insurers waded into in pursuit of even greater profits. Some of the biggest bond insurers are facing potential claims that may deplete their capital. Their share prices have plunged, and credit rating companies are scrutinizing their AAA status. Ambac became the first insurer to lose its triple-A rating, when Fitch Ratings downgraded the company to AA on Jan. 18.

The WSJ had a long column on monolines last week (but not on the AAA to CDO/CDS shift). Usually, the MSM is 6 months to a year behind us. This was only 4 days.

That’s not too bad. . .


Ambac, MBIA Lust for CDO Returns Undercut AAA Success
Christine Richard
Bloomberg, Jan. 22 2008

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. SINGER commented on Jan 24

    Given the attempted bailout announced yesterday, among other things, is this really a “free market”???

  2. dblwyo commented on Jan 24

    It means that the MSM were/are paying attention and more to key bloggers. Reverse osmosis. Count the memes that have propogated that are large and critical from recession to housing prices. Be interesting to see how this feedback loop starts working, eh ?

  3. Karl K commented on Jan 24

    A couple of points on the monolines.

    First, the Fed cut Tuesday was not to prop up the equity markets but instead was designed strictly to stop the bleeding in financials. And on my screen Tuesday, as a lot of stocks were red, others — JPM, C, WFC AND MBI and ABK — were all green. The move worked.

    Second, there are some who post on here who, for lack of a better phrase, I would call “bear market porn afficiandos.” The simply get off on the idea of “ooooh, it hurts so good!” Look, market corrections come and go, as they should, but the we cannot, we simply must not, have a real credit market meltdown. We were heading in that direction. Instead we need an orderly, if painful, write down of these assets. I am all for wringing out the excesses, but let’s be smart about it so we can come back another day.

    Third, on the monolines. The market, in my view, has overreacted. Sure, they were incredibly stupid to get into the CDO/CDS market. But keep in mind that all the markt to market adjustments killing the banks are irrelevant to a bond insurer. The risk they face is whether investors lose principal and interest on the underlying investments and trigger their guarantees. These guarantees sit toward the top of the capital structure and even if the guarantee is called they pay out principal only at the original redemption date so the NPV exposure is a slice of the notional sums insured.

    We’re not out of the woods yet. The TRULY stupid players like SCL and ACA in the market are terminal. And AMBAC and MBIA may run out of liquidity before they get their own capital house in order. But to have them truly collapse would not be a good thing. Their business models are wrecked and they will be shadows of their formal selves, but death is from a market psychology point of view a really really REALLY bad idea.

Posted Under