ACA Reminds the Markets of the Importance of Counterparty Risk

| About: ACA Capital (ACAH)

Here's the chart of ACA Capital Holdings' (ACA) share price, from when it went public at the end of 2006 at $13 per share, through to Tuesday of this week, when it was delisted at $0.31 per share.Yesterday, S&P finally got around to slashing ACA's credit rating to CCC. And the ratings agencies wonder why they're always accused of being behind the curve.

The impending failure of ACA, by the way, is big news: already Canada's CIBC has said that it has some $3.5 billion in ACA counterparty risk, and I'm sure that's only the beginning. ACA has been writing a lot of credit derivatives, and the most important thing in any derivatives contract is that your counterparty doesn't go bust. If it does, you're buggered. For many years, counterparty risk was not priced in to CDS contracts - a mistake that many traders, I'm sure, are beginning to regret. That, and trusting what the ratings agencies were saying about the degree to which one could rely on ACA being around in future.