Assured Guaranty: Vulnerable to Continued Bond Market Troubles

This is the result of my research on Assured Guaranty (AGO). Since it is rather extensive, I will only post the industry and company highlights in HTML. The full version has valuation, mark to market losses, peer group comparisons, pro formas, etc. Technically this is still a draft/release candidate, but I will release it to the public domain anyway. Beware, it is (as is everything else) a work in progress and subject to change. You can download it here:

Assured Guaranty_Consolidated (796.13 kB 2008-03-21 12:12:42) or continue on for the industry overview.

I. Industry Overview and Investment Highlights

AGO remains vulnerable to continued bond market troubles

Assured Guaranty (AGO) has until now fared better than its peers in credit and capital markets owing to a significant cushion that it has in the form of a relatively higher share of superior grade investments in its insured portfolio. While stocks of other bond insurers, specifically Ambac (ABK), MBIA (MBI) and Security Capital Assurance (SCA), have fallen sharply over the last few months, AGO has sailed successfully through the rough waters with its stock performance hardly bearing the brunt of the current turmoil in the bond insurance market. This has been primarily on the back of the favorable ratings AGO has till now enjoyed from various credit agencies. However, despite AGO's strong fundamentals the debacle in the credit market could seriously impact its financial position, causing rise in default losses and mark-to-market write-downs of its portfolio. The rating agencies, which have so far maintained triple-A ratings on AGO and have been under constant pressure to review all bond insurers' ratings, are likely to start considering a rating downgrade in view of projected losses from defaults. Any downgrade of AGO rating will seriously impact its advantageous position over other bond insurers and make it more competitive for the Company to insure new offerings.

I.1. Investment concerns

o Destabilizing US bond insurance industry. Having been hit hard by the unfolding debacle in subprime mortgage debt, the bond insurance industry is witnessing large-scale losses and rating downgrades. Large insurers like MBIA and Ambac which are striving to maintain their triple-A ratings are trading at 6.5% and 15.1%, respectively, to their last 12 month high. FSA and AGO are the only insurers which have managed to retain top ratings right through the debacle. While a large number of market participants are contemplating a further downgrade of ratings (including for AGO and FSA) in view of current gridlock in the credit markets, many of them are also projecting a rise in the global speculative-grade default rate which was at the lowest level at 0.7% in February 2008 in the last 12 years.

o Credit ratings likely to be a case for question. Credit agencies including S&P, Moody's and Fitch have maintained triple-A rating on AGO all this while, injecting a lot of confidence in the investors, but questions are being increasingly raised on the authenticity and justification of credit agencies' ratings in view of the subprime and credit market meltdowns. Ambac and MBIA commanded triple-A ratings until huge losses on their portfolio surfaced and their stocks lost over 80% of their value. Recently, while S&P reaffirmed an AAA rating for these two stocks, Fitch downgraded Ambac to AA and is considering downgrading MBIA. In addition, the fact that AGO also assigns internal rating to its portfolio raises a lot of doubts over possible revision amid a likely increase in default rates off worsening credit conditions.

o Increasingly challenging environment to retain triple-A ratings. Bond insurers including AGO are under constant pressure to maintain triple-A ratings to ensure that their ability to guaranty new issues does not deteriorate. With an estimated $250 billion of subprime mortgage write-downs still projected to be in the pipeline and bond insurers like Ambac and MBIA having already eroded a substantial portion of their capital, it is going to be extremely hard for them to retain the top ratings. Rating agencies are also under constant pressure to review their ratings amid rising concerns that the cushion the bond insurers have against possible (and rising) defaults is inconsistent with triple-A ratings. AGO, which has a relatively higher exposure to investment-grade securities, is likely to bear the brunt of losses and face a possible revision in its top-rating. While this may impact AGO's ability to insure new bond issues, it may also endanger the additional $750 mn financing arrangement from Wilbur Ross, which is contingent upon maintenance of triple-A rating by the Company.

o Stress on municipal bonds. Mounting fears of US recession led by weakening macro-economic fundamentals have raised concerns over a rise in defaults on municipal bonds. With conditions in the US residential and commercial sector continuing to worsen, municipal authorities face a difficult task of achieving their tax receipt targets which could in turn lead to increased budget deficits. California's deficit, for instance, had already ballooned to $16 bn in February 2008 from $14.5 bn in January 2008 off reduced tax collections caused by falling housing prices. Lowering employment levels (as evidenced by the biggest layoffs in five years of about 63,000 jobs in February 2008), fast declining capital expenditure and decelerating industrial output are adding to the woes.

o Escalating mark-to-market losses on CDO/CDS. Widening credit spreads in the fast deteriorating credit markets have resulted in large scale write-down in value of RMBS and other underlying securities. The US housing and mortgage sectors have hardly shown any positive response to Fed's aggressive rate cuts in the recent months to ease panic liquidity conditions stemming from uncertainty over the future of the US economy. The falling values of the underlying RMBS and CMBS are putting serious downward pressure on CDO/CDS that AGO underwrites impacting the Company's bottom-line. AGO reported mark-to-market losses of $221 mn and $411 mn in 3Q07 and 4Q07, respectively, resulting in negative earnings of $115 mn and $260 mn in these periods. AGO's mark-to-market write-downs are likely to be equally significant in 2008 and 2009 since the macro economic indicators have not demonstrated any recovery amid a growing probability of recession, which could result in further widening of credit spreads. As a result, we expect AGO to report $598 mn and $469 mn mark-to-market losses on CDS exposure in 2008 and 2009, respectively.

o Significant exposure to highly default-prone structured finance. AGO has a considerable exposure to credit products which are highly prone to defaults. Of the Company's total exposure of $200 bn (net par outstanding), around $74 bn or 37% is in structured finance products including RMBS and CMBS which have a relatively higher chance of defaults. The composition of the Company's RMBS exposure is again a cause for concern as 92% of the total RMBS exposure is in the RMBS with vintages 2005-2007, which raises a red flag in respect of a probability of defaults. Although most of these products fall under the super senior or AAA category (based on AGO's internal ratings), rising investor doubts over bond insurers' ratings command lower investor interest. As of December 31, 2007, AGO's closely monitored portfolio, which the company considers as most venerable to default, stood at $2.1 bn against shareholder's equity of $1.7 bn.

o Exposure to troubled markets. A close review of AGO's geographical exposure might raise investors' concern over AGO's financial performance in the near-to-medium term. AGO has nearly 10% of its exposure in the troubled states of California and Florida, which have witnessed a steep decline in the housing prices over the last one year. In addition, within the AGO's international finance, exposure to the UK stands at nearly $25 bn or 13% of its net par outstanding. With elevating corporate default rates in Europe, we believe that AGO's international exposure could also face higher losses. As on December 31, 2007 mortgage guaranty risk in force from the UK stood at nearly $0.9 bn out of $1.1 bn total (international) mortgage guaranty risk in force.

o HELOC securities by Countrywide could be a complete washout. Most of AGO's $2.4 bn exposure on HELOC is rated BBB ($0.5 bn) and below-Investment grade ($1.8 bn). This is because around 88% of the HELOC securities underwritten by AGO ($2.1 bn) are issued by Countrywide Financial. Countrywide has been downgraded by Moody's and Fitch and placed on negative watch by S&P. We believe AGO's HELOC exposure will convert into a complete default considering the financial state of Countrywide. An assumed 100% default on HELOC securities will wipe out AGO's entire $1.7 bn shareholders' equity (as of December 31, 2007).

o Soaring default rates and losses. Delinquencies, defaults and foreclosures on home mortgages have spiked significantly over the last one year, negatively impacting the performance of RMBS transactions which are now expected to absorb higher mortgage losses than was originally anticipated. According to S&P, delinquency rates for pooled subprime loans issued in 2005 have increased to 34.4% while those for Alt-A and Prime jumbo loans have soared to 18.1% and 18.2%, respectively. For HELOC loans issued during 2005 and 2006, delinquency rates are up 6-7%, while for closed-end home-equity loans delinquency rates have increased to 12%. As a result of a higher default in the housing sector, we expect bond insurers to experience higher defaults under their RMBS and CMBS transactions. As housing problems creep further into consumer spending affecting corporate profitability and lower tax revenues for the government, default rates will rise over their historical rates for the corporate and municipal bonds. We have computed total expected losses of $2.1 bn, $2.4 bn and $2.8 bn under the best case, base case and worst case scenarios, respectively, (The assumptions under the three scenarios have been detailed in the later sections of this report).

o Recent opposition of municipal bond rating mechanism. Of late, municipalities have been opposing adoption of different standards for rating corporate bonds and municipal bonds on the pretext that the same set of guidelines be applied for rating municipal bonds, which are less risk prone than the corporate bonds. This is also in view of the fact that municipalities have been experiencing a rise in interest rates or fall in bond values owing to a recent less favorable outlook being assigned towards them by the rating agencies. The interest costs on auction-rate securities issued by municipalities have nearly doubled since January 2008. Issuance of municipal bonds in January 2008 were 38% lower than a year before in part due to lower confidence levels now associated with the municipal bonds. From a bond insurer's perspective, any move towards bringing parity in the rating mechanism will mean that most of the municipal bonds would secure triple-A rating. This will translate into lower premium income for bond insurers, or in other words, softer insurance markets lead to diminishing costs for the municipalities, as is being increasingly demanded by them. Another emerging trend is that an increasing number of municipalities are becoming wary of securing insurance for their bonds on the fear that a possible negative outlook associated with the bond insurer could impact the response to the municipal bonds. Of the more than $20 bn issued in municipal bonds during February 2008, just $5.4 billion or 27% were covered by financial guarantors, compared with more than half of the $39 bn issued during the same period a year before.

o A possible split of municipal and corporate bond business. Over the years monolines have successfully built a mixed portfolio of the high-yield and riskier corporate bonds and the relatively safer municipal bonds. Municipal bonds have effectively worked as coverage for a crash in the corporate bond market as has been witnessed in the course of last year's credit market meltdown. However, of late the prolonged problems in the corporate bond market have spilled over to the municipal bond market endangering the values associated with municipal bonds. As a result, talks of mandatory splitting of the two lines of monoline businesses have started doing the rounds. In fact, FGIC has already filed for a split while Ambac pondered, but eventually decided to issue highly dilutive stock to raise capital. A split will create havoc for the structured finance business of any bond insurer including AGO. It is believed that a stand alone structured finance insurance business will be a complete wipeout dragging along with it the values of the insured securities. Since this will mean serious threats to security values, many investment banks have been rumored to have been pooling money into the monolines to safeguard their vested interest. As of the penning of this document, all the banks have offered was an ambiguous back stop of a dilutive offering of Ambac shares to the tune of $2 bn. AGO, though still regarded as a safe bet, has also secured capital commitment from Wilbur Ross to safeguard against an impact on its capital from a possible slowdown of its structured finance insurance business and to pursue municipal business. The introduction of Warren Buffet's companies into this field is akin to the elephant in the room, with their vastly superior capital base, superior ratings outlook, extensive experience in insurance and risk management, as well as his marquis brand name, he significantly changes the competitive landscape in an industry facing considerably less demand from its constituencies.

I.2. Investment positives

o Superior fundamentals relative to peers. Relative to its peers, AGO commands stronger fundamentals and has higher equity coverage to its exposure. At $200 bn net par outstanding, AGO's net part outstanding-to- shareholders' equity is 120X which is lower compared with those of its peers. AMBAC's net par outstanding of $524 bn is 230X its shareholders' equity, while MBIA's exposure of $673 bn is 184X its shareholders' equity. Further, AGO's exposure (at $18.2 bn) to the highly default prone US RMBS is also lower than $43.1 bn for AMBAC and $45.2 bn for MBIA as of December 31, 2007.

o Considerable subordination levels. AGO's RMBS transactions benefit from higher levels of structured credit protection through subordination. The company has 38%, 39% and 23% subordination level for closed end seconds, subprime and Alt-A RMBS transactions, respectively. Additionally, the company has a 34.8% subordination level for pooled corporate obligations and 35.3% subordination for CDOs of mezzanine ABS. Although the Company stands to benefit from any loss arising from exposure to these RMBS transaction through higher levels of subordination, the lower level of subordination at 1% for HELOC, the most vulnerable part of AGO's insured portfolio, remains a key concern for the company.

o Favorable ratings relative to peers. AGO is one of the few monolines which have been able to maintain top ratings in an environment where rating downgrades are becoming an order of the day. While in the recent months rating agencies including S&P, Moody's and Fitch have revised their outlook on most of the monolines mainly on the adverse side, on the back of the rising probability of defaults and falling bond values, AGO has all through been able to retain triple-A rating from all the three rating agencies. The primary reason which goes in favor of AGO is the quality of its exposure relative to its peers.

Though as mentioned above, credibility associated with such ratings has come under scrutiny in the past year owing to the actual events/performance turning out to be quite contradictory to the ratings, it can be derived that AGO has had a stable and trouble-free journey till now relative to its peers.

Comments

[User 169224]

Barking up the wrong tree, these high level Macro logic worked for Ackman on MBIA & Ambac as those two truly wrote shitty business. Here are the facts
1) 1% of the Par outstanding is below Investment Grade
2) No CDO of ABS written since 2003
3) $6.3B of Net Par is Sub Prime which attaches at 39% ie close to 40% of the deal has to go kaput so even if defaults rise to 50% and you lose 50% on the house losses don't go beyond 25%
4) HELOC Risk is the only Risk at a total of $2.1B from two Countrywide deals. The way these deals are structured once losses escalate these deals start trapping cash to protect the AAA investors, also any new draws (HELOC are not fully drawn) are jr to existing holders so by the time the excess spread builds your attachment points are north 0f 10%. Management has said if BofA deal goes through 0 loss (because the draws are funded b

[User 169224]

by the issuer), so the reason that deal matters is counterparty credit if BofA deal falls then CFC is your counterparty hence a very shaky counterparty. Although the loss range given is wide 0-100MM the base case outcome is 30MM of which 18MM was reserved in Q4.
5) Muni Credit- Can't have it both ways, on one hand you say there are losses in this sector on the other hand say that all these issuers can go direct and still get AAA
6) Worst time to allow Muni's to go direct what are the sources of revenues for Municipalities? Taxes, what is happening to Property taxes, personal taxes, Business Taxes? all are going down making Muni's a shakier credit
7) Corporate Pooled obligations- 35% subordination, no issues there

Now lets talk about why this will be the best opportunity you will see in Finance barring the Title Insurers. At the risk of oversimplification this is no different than buying a reinsurance stock after a hurricane has hit for major losses. Look at RNR as an example post major events.
Here are the facts why this is a great stock
1) Pricing is up between 50%-300% across lines
2) Risk goes down, you attach at higher points just read the ACF release on FSA deal
3) Competitive Landscape decimated, FGIC Gone, SCA, Gone, CIFG Gone, Ambac and MBIA on their Deathbed out of the market for 1 year minimum
4) In every catastrophe someone always wins-
AGO Market Share
Jan 07 Dec 07 Jan 08 Feb 08 March 08
1% 9% 23% 34% 47%
5) Unlike Reinsurance where you have reinvestment risk after 2 years in this case the tail is 10-15 years so no reinvestment risk
6) Wilbur Ross provides just in time capital which is good for shadow ratings

I can go on and on but some investment are simple when 60% of your competitors are out of business and you had a 1% market share you don't have to be a genius to make money.
Earnings power will be closer to $4.00 in 2 years book ex the CDS MTM losses is at 28 you be the judge on valuation metrics based on your own approach but hard to not own this one here.

[Mr Mortgage]

Great job Reggie...looks like an AGI rep or buy side ANALyst responded to you. Makes me suspicious when someone take so much time to reply. Anyway, great story. They tried to say Accredited had 'better subprime loans', IndyMac had 'better alt-a loans', Fannie 'is all Prime'. Hogwash...AGO might be the best of the bunch but the sector has been decimated. They do not have the money to cover the claims coming their way. Period. It is a Ponzi scheme about to get taken down.

Here is a great story about the insurers...

EXCERPT

NONE of the firms writing this crap have the capital behind them to survive any significant phalanx of claims. They can't because the fiction that underlay this entire business model was that you could buy insurance against default for less than the actual risk premium over risk-free return. In short, the model was predicated on the ability to find a "free lunch."


Now, however, the claims are coming fast and furious and the truth is coming out - the capital simply is not there, and the insurance these people bought is in fact worthless!

www.tickerforum.org/cg...

[NOYBIZNIZ]

You wrote: "FSA and AGO are the only insurers which have managed to retain top ratings right through the debacle."

WRONG. Last time I checked (just a moment ago), MBIA has retained it's AAA rating from all three agencies.

If one can find such demonstrably inaccurate "analysis" right in the first paragraph, then why should the rest of your "report" be trusted for accuracy?

[ReggieMiddleton]

You guys on Seeking Alpha sure happen to be a negative, criticizing bunch. The AGO analysis was very objective in my opinion.

@NOYBIZNIZ
"Last time I checked (just a moment ago), MBIA has retained it's AAA rating from all three agencies. "
I suggest you check again. MBIA and Ambac are on negative watch - or it's equivalent, if I am not mistaken and Fitch has withdrew the AAA moniker from Ambac and most likely will do so for MBIA. Research the back and forth between Fitch and MBIA CEOs. AGO, at this point in time, has no such issues. Take a chill pill and practice positive reflection. It is quite possible to be critical of one's work without such a negative overtone.

@ Mr. Mortgage
I agree with you 100%. The amount of analytical rhetoric put into that comment does make you wonder... You are also correct about the premise of the monoline business model. What these companies are trying to do is sell protection for less than what the market charges. In order for that to work, the market must be consistently wrong in its risk pricing, which is highly unlikely. Any profitable arbitrage situation is, by definition, transient in nature for market participants adjust their view to compensate for the over/under compensation of the risks and rewards inherent in the arbitrage. So, even if X monoline insurer has found that the market is overcharging for said Y risks, the market will adjust once it realizes that X monoline is profiting from said mismatch. This is why arbitrage strategies must be changed regularly in order to be successful. Fool me once, shame on you, fool me twice, shame on me.

@User 169224
I don't have the time to address your rather lengthy, but apparently well thought out post. I do invite you over to the blog boombustblog.com where we have a few P/C, reinsurance, and risk management experts, and my analysts who will be happy to engage in fruitful discourse, not to mention yours truly. Let me address what I have time to quickly though:
- The title was given by seekingalpha staff, not me. I titled the piece, ”My AGO Update”.
- I declared AGO to have some of the most astute management in the business. This is a positive thing, no?
- AGO itself has approximately (I can't remember the exact number) 100% of the value of its equity under watch as being at significant risk for default. It is not as if everything is rosy in wonderland.

- Insured muni risks have a plethora of funding sources. Please reread the report more carefully. I believe that many of these risks will have higher than historical mean losses, but they are also more diverse than you assert. In any event, many munis would be rated at a level that allows them to forego insurance if they were rated at the same keel as corporate and the ratings agencies are succumbing to those pressures. Moody’s has agreed to do so going forward, which eliminates a large swath of monoline business.
- You stated "Muni Credit- Can't have it both ways, on one hand you say there are losses in this sector on the other hand say that all these issuers can go direct and still get AAA". This statement shows that you have been drinking the ratings agency “Kool Aid”. Does triple A automatically mean that no losses will be coming down the pike. I strongly suggest that you peruse the news from the last few months or simply Google Triple A and losses. Try this interesting article on for size:
"None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank in May 2006 is AAA at both companies even though 43% of the underlying mortgages are delinquent.
Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that's triggered $188 billion in write-downs for the world's largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.
“The fact that they’ve kept those ratings where they are is laughable,” said Kyle Bass, CEO of Hayman Capital Partners, a hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. “Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.”
from financialweek.com: www.financialweek.com/...
Basically, ratings and losses, at least for the last two years do not bear the correlation that many of the monoline bulls would like them to – and this applies to more than just mortgage fixed income securities as well. If you have been following closely, the municipal sector is already showing chinks in the armor, and we have are just getting started.
- I don't want to toot my own horn, but I have a fairly decent track record at this analyzing company investment prospects stuff. Why don't you come by the blog or even "objectively"... browse through the research that I put on seekingalpha (that is far from complete, which is why I suggest the blog) and judge me based more on my macro accomplishments rather than your opinion on one particular company? I would like to believe that I have built some credibility, or is that just pie in the sky wishful thinking?
- The number of viable competitors has decreased significantly in the monoline space, but the actual competition itself has not decreased as much as the landscape of opportunity has shrunk. Many municipalities have gone the direct route, and many more are going with insurers that have no structured product taint, ex. B. Hathaway companies. Buffet, et. al. has taint, no pressing need to raise "small" amounts of capital, ex. a billion or two, and tons of undisputed credibility. For the risk averse public official, this is a no brainer. Despite this, even the president of BHAC has stated that he is pessimistic on the future of the monoline industry. If anybody has a reason to be optimistic, it would be him.

- The pdf report for download is very detailed with all assumptions fleshed out and is the most comprehensive work on the company that I know of. Unfortunately, I have not the time nor the inclination to rehash the researh contained within on a micro level here. If you wish to discuss it more detail, come over as I suggested earlier and we can have a pow wow. I think that’s enough for now, and look forward to seeing you on the blog.

[Mr Mortgage]

ANOTHER REASON AGO HAS NO FUTURE...NO MUNI BUSINESS IN THE FUTURE LEAVES AGO WITH THE TRASH.

4 hours ago
Why California Isn't Buying Warren Buffett's Bond Insurance

Warren Buffett is getting two very different messages from the capitals of two of the nation's most influential states: New York and California.
Late last year, with the encouragement of New York's top insurance regulator Eric Dinallo, Buffett's Berkshire Hathaway launched a new bond insurer. Dinallo asked Berkshire to get into the game because he was worried that the financial troubles facing established bond insurers like Ambac [ABK 5.81 -0.24 (-3.97%) ] and MBIA [MBI 11.99 -0.51 (-4.08%) ] would make it harder for cities and towns to find willing buyers for their municipal bonds.

If bond buyers can't trust the insurance company backing the bonds, they'll demand higher yields to compensate for the increased risk they won't get their money back. Higher yields may be good for the buyers, but they increase the cost of borrowing money for perpetually cash-strapped municipalities.

Buffett says he'd been thinking about getting into bond insurance for years, but didn't because he thought the scramble to write new policies had driven down prices so low they didn't cover the risk being taken on by the insurers.

With Ambac and MBIA facing big losses in the wake of the sub-prime collapse, Buffett sees an opportunity to use Berkshire's strong financial position to back muni bonds, at what he sees as an appropriate (higher) price.

California's Treasurer Bill Lockyer sees it differently. He sees decades of history in which almost no muni bonds have fallen victim to a default. (MBIA and Ambac got in trouble not because they guaranteed munis, but because they branched into riskier areas, backing bundles of other loans, including those notorious sub-primes.)

Lockyer argues that the main reason muni bond buyers think insurance is needed at all in most cases is because the big credit ratings agencies don't evaluate state and local government debt the same way as corporate debt, artificially lowering credit ratings for those governments.

He's now proposing that some big California pension funds start their own muni bond insurer to compete with Berkshire, and tells Bloomberg and Reuters he won't do any business with Buffett, accusing Berkshire of supporting the two-tiered credit rating system.

While not exactly endorsing the corporate-government split, Berkshire's top insurance executive Ajit Jain did acknowledge in prepared testimony for a hearing by the House Financial Services Committee that "if the rating agencies level the playing field in terms of how they rate municipal versus corporate obligations, there will be little need for a financial guaranty insurance marketplace as we know it, because much municipal debt on a stand alone basis may not require the enhancement of the insurance to manage the costs of that debt."

That's one of the reasons Jain said he's "very concerned about the long-term viability of this business (bond insurance) in general and for us in particular."

Perhaps the bigger disagreement between Berkshire and California is on how risky muni bonds really are, an assessment that helps determine the 'right' price for bond insurance.

In his testimony, Jain argued against the 'no risk' view of muni bonds"

"There is hardly a sufficient history to conclude that there is a zero chance of loss in this business, although that is the assessment that gets reflected in the pricing. While there have been few municipal defaults in the past fifty years, Jefferson County, Alabama and Vajello, California, both having received publicity lately about possible defaults on their debt obligations, could just be the tip of the iceberg as municipalities are coming under increasingly unfavorable economic conditions, including reduced real-estate and sales-generated tax revenues and underfunded future pension and healthcare costs."

If California does gets its way, and the credit agencies do change their ratings system for government debt, Berkshire's "tip-toe" into the bond insurance business may not last all that long, leaving the state a clearer field to take on the very small, but potentially catastrophic, risk of widespread muni bond defaults.

[gabeborenstein]

With FED's recent intervention,implicitl... recognizing aaa rating of the subprime "paper"........ the 'questionable"ins... to be swapped for the treasuries,all of the bond insurers can finally sit back and relax.The FED is not allowing any financial institution to go under and is guaranteeing every institutional component of our system.Only shorts with the position in the financial sector will have a financially painfull experience.The FED had acknowledged the issues and is addressing them .The FED has no P&L but a mandate to stabilize economy and the markets-The FED will prevail and financial sector of the stock market will have uprecedented rally in the period ahead be it MBIA or Ambak .Current psychology is not synonymous with the economic reality.

[Mr Mortgage]

good job reggie...I can't believe there are people who still believe in the business model.

[Cloisonne]

Hi Reggie, I recently joined your blog, I am quite impressed with your knowledge and agree that AGO is way over valued. Thanks