Posts filed under “Valuation”
The monoline insurers — the firms that issued default insurance on muni bonds that never default — have been buried by more than a trillion dollars worth of derivative bets, more than 10% of which have gone bad.
That $130 Billion worth of CDO/CDS exposure makes it highly unlikely that anyone is coming along to rescue this group of risk-loving, derivative-misunderestimating, technically-bankrupt insurance managers. As we mentioned saeveral weeks ago,
While absurd rumors swirled around the unlikely purchase of Ambac (ABK) by Wilbur Ross, various other forces have been moving to make sure that the bond assurance will continue to exist for various state and city projects. Even though Munis very rarely default, the cost of Bond Assurance ends up paying for itself many times over, as it allows cities and towns to pay significantly less in borrowing costs over the life of the bond issuance.
As we mentioned several weeks ago, that was a lovely, low risk business, with little defaults and a steady
revenue stream. At one point in time, AMBAC had the highest revenue per
employee on the planet.
That situation was obviously intolerable, and so managment embraced riskier, higher yielding derivatives. Over that period, the monoline stocks have lost about 90% of their value. (Ouch!)
The latest rumor making the rounds is that Wilbur Ross will buy Ambac. Reports that Ross will invest in the battered bond insurer Ambac have soothed investors. But as Roddy Boyd argues, the deal makes no sense whatsoever:
"If Ross were to purchase Ambac in an
"as-is" arrangement, he would be buying an enterprise with a staggering
$67 billion in CDO exposure, of which $29.1 billion consists of
asset-backed CDO’s of increasingly dubious credit quality. The company
also has $8.4 billion in sub-prime mortgage paper in its portfolio. All
told, Ambac’s financials show that the insurer has $14.5 billion of
claims-paying resources to support a $524 billion guarantee portfolio,
figures so unbalanced that the company’s attempt to raise $1 billion or
more in emergency capital via an equity or convertible offering had to
be scrapped last week."
Now, with the monolines bouncing on the highly unlikely take out by Wilbur Ross, a new sheriff has come to town: Warren Buffett has "agreed" to expand Berkshire’s new bond insurer nationwide — in exchange for
faster licensing — according to a group of U.S. state regulators.
In order to come into one of the most profitable and mismanaged segments of insurance underwriting, Buffett has coyly struck a deal that fast-tracks the messiest part of the business. Now THAT’S bloody brilliant.
Here’s Bloomberg’s take on the matter:
"Cathy Weatherford, chief executive officer of the National Association of Insurance Commissioners, on Jan. 10 offered to help speed approvals if Buffett’s new company agreed to simultaneously apply to all states with a uniform application, NAIC spokesman Scott Holeman said today. "Berkshire has committed,” Holeman said in an interview.
Berkshire’s bond insurer may help stabilize debt markets, which have been roiled by the prospect that MBIA Inc. and Ambac Financial Group Inc., the industry’s biggest guarantors, may lose their top credit rankings. A downgrade may affect $2.4 trillion in assets industrywide, and Fitch has already stripped its AAA rating from Ambac after losses tied to subprime loans.
To induce Omaha, Nebraska-based Berkshire to submit the application to all states, NAIC proposed a pilot program waiving a requirement that an insurer using a uniform application have a track record in the type of insurance for which it wants new licenses, Holeman said.
I was originally going to title this "Buffett to Wilbur Ross: Up Yours" but I thought that too harsh. And Ross seems to smart to buy into the Ambacv/MBIA snake oil . . .
Friday, January 18, 2008 | 07:30 AM
A Regulator Not Stymied by Red Tape
JOSEPH B. TREASTER
NYT, January 9, 2008
Has Wilbur Ross lost his mind?
Fortune, January 25 2008: 4:19 PM EST
Buffett’s Bond Insurer to Go National, Regulators Say
Josh P. Hamilton
Bloomberg, Jan. 28 2008
Fannie Mae’s fuzzy math: Fortune magazine reported that the lender changed the way it discloses bad loans, which could be masking rising credit losses. “Investors might want to take a closer look at Fannie Mae’s latest earnings report. Lost in the unsurprising news of the mortgage lender’s heavy losses was a critical change in the…Read More