This book review is special to me. I don’t often get quoted in books, but in this book I get quoted on page 98. Here is the quotation:
When I asked an insurance analyst whether he thought the credit rating companies would ever rethink MBIA’s top rating, he was skeptical. “For Moody’s [or Standard and Poor's] to put a bond insurer on negative watch (indicating a rating cut was being considered) could have extremely negative ramifications” for the entire bond insurance business, said David Merkel with Hovde Capital Advisors in Washington, DC. “It’s a bit of a confidence game.”
Confidence Game indeed. I did not see the phrase elsewhere in the book, but I may have missed it. If I inadvertently titled the book, I am honored.
I do not remember talking to the author, Christine Richard, but what she quoted was broadly representative of half of my view on the financial guarantee insurers. I believed that it would be very difficult for the rating agencies to downgrade the financial guarantors, because they were such a large part of their AAA ratings, and because they would lose money in the short run from doing so. Though it was written a year later, this article at RealMoney reflected my views.
In the short run, I viewed the rating agencies and financial guarantors as co-dependent. The rating agencies would protect the guarantors for as long as they could, and after that, the bottom would fall out, and it would become a “free fire” zone.
All in all, over the next five years I wrote over 30 times about the financial guarantors. Here is a sample of that (in rough chronological order):
- Miscellaneous Notes, Redux
- A Tale of Two Insurance Companies
- Insurance Asset Quality, Part 3
- Contemplating Life Without the Guarantors
- Not Dissing Warren the Wonderful
- The Beauty of Broken Moats
- What Would Happen to Structured Products if the Guarantors were Insolvent?
- Thirteen Notes on the Nexus of Woe: Financials and Real Estate
- The Dike Has Sprung a Leak
- All or Nothing at All
- Five Thoughts on the Financial Guarantors
- Moody’s Downgrades XL Capital Assurance
- Bill Ackman Talks His Own Book
- Shelter Fallout
- The rating agencies have been dragged. When will the kicking and screaming stop?
- Now, That Was Fast!
- Downgrades Come Easy, Upgrades Come Hard, Upgrades to AAA? — Forget It.
- The Rules, Part XI
Again, my view was that the financial guarantors would eventually be downgraded, but that the rating agencies would delay it for as long as they possibly could. That is what happened.
Now, as for Bill Ackman, he was prescient; he saw the problems early — way too early. As I said about Markopolous and Madoff, it is usually a mistake to obsess over something that is manifestly wrong, but that you can’t affect. Ackman spun his wheels for years over MBIA (MBI), and he was right eventually. Many other men would have given up, but not Ackman. And part of that is the nature of shorting; it is normally supposed to be a tactical discipline rather than a strategic one. There are few companies that one can short into the ground, and Ackman almost went that way with MBIA.
But when you are right, you are right, so long as your funding base sticks with you. Ackman had loyal investors, because the gains took years to manifest.
As for the author, she has carefully balanced the words of Ackman versus the words of others in the situation. She has done an admirable job of being neutral while still portraying the victor fairly; would that the heads of MBIA talked to her more. Sadly, they come off as a bunch of hacks who don’t understand that their models relied on a highly liquid economy, with rising housing prices.
I recommend this book highly.
Who would benefit from this book
Most average investors could benefit from the book. It would tell them that economic systems that rely on third-party appraisals are inherently fragile. They can be gamed by those with a concentrated interest for a time, until reality catches up with them.
Full disclosure: Janet Tavakoli told me I was quoted in the book, so I asked the publisher for a copy to review.
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