Bill Gross, in the FT, asks some rather intriguing questions late last week:
"How could Ambac (ABK), through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy? How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority?"
The alchemy identified by Gross: Wrapping high risk paper in a high risk derivative / insurance contract does not eliminate any of the risk, nor does it make high risk paper investment grade.
This is slowly being realized for what it actually is: Massive fraud on a widespread structural basis.
Rescuing monolines is not a long-term solution
Published: February 7 2008 18:14