Carl Dincesen

Ambac, MBIA Are Still Shorts Amidst This Wink-and-Nod

Some facts the "experts" miss: Ambac and MBIA insured bonds never in their history traded equal to natural triple A bonds. They always traded at double A levels in both the tax exempt and taxible markets, ask any trader. The holding companies have never been rated triple A. The stress case scenarios that the rating agencies use are in fact depression (1930's style) scenarios. Simple put, at any point in time a triple A financial guaranty insurer must have minimum capital equal to 100% of depression losses at a 99.9% probability with an extra 20-30% capital cushion thrown in for good measure. No one who understands the business has ever suggested that the insurer would necessarily maintain a triple A rating during or after a depression.

Credit ratings are simply an informed opinion as to the likelihood of getting paid in full on time in a very stressed environment with triple A's the most likely survivors. Read the rating agency credit rating definitions, and then read the raters' rating methodologies for financial guarantee insurers. Default assumptions for categories of risk can change but the fundamental approach has remained the same for more than 30 years.

The unprecedented speed and magnitude of home price declines in certain housing markets is a natural result of the unprecedented speed and magnitude of the immediately preceding price appreciation that was fueled in large part by the collapse of mortgage under writing standards beginning in 2004. Those depreciating markets are well on there way to reaching price levels consistent with current personal income levels which is and always has been the fundamental driver of residential real estate values. There will be blood but the patient will recover faster than many think unless we have a depression in which case I would rather be holding Ambac or MBIA insured debt than uninsured A rated debt. Is that not the fundamental reason why investors have been giving up a little yield in exchange for insurance protection during the last 34 years?