vittello

Whither Municipal Bond Insurance?

This is a decent article on Abk. I found the phrase, "Municipal defaults are often caused by treasurers getting out of their depth in terms of derivatives they don't understand" most relevant to predicting the future of this industry/company. There is no way serious bond investors are ever going to invest in something that is not insured because Mr. Solomon's point in the above quote is now clearer than ever. And, as stated in the final paragraph , AAA "ratings have never been less valuable"-therefore, it is not the monlines that need to have faith re-kindled, but I suggest the ratings agencies themselves.

MBIA and Ambac: Edge of the Cliff, Ratings-Wise

Everyone is missing the story here. Up until about a year ago, MBI and ABK were blue chip companies with a nice stock price and a quiet, well managed business. Then they, along with many others, insured a wall street product blessed by the major ratings agencies as recently as last summer. Having rated structured finance in various forms for the past few decades, the ratings agencies will state that they were more than competent to judge the tranches individually and the CDOS as a whole. As the NY AG pointed out last week, these agencies were working too closely with the banks on getting products of a certain high grade to the market whether they deserved it or not. So, ABK/MBI et.al insure the products based upon the ratings assigned-shortly thereafter, the ratings on these tranches start to decline and the insurers are now sitting on a rmbs cdo portfolio of junk for the most part. Fortunately, companies like ABK have the reserves neccessary to maintain a AAA rating and decide to protect those reserves by choosing to not write new business which would have required them to raise their reserves, thus jeopardizing their ratings again. If you check their website and review their June 4 presentation, you will get an accurate, timely insight into the company. Just after this presentation, the ratings agencies attacked them out of nowhere and raised the bar on them. In the meanwhile, wall street has been steadily, building up the short pressure on the share price. Why? Because ABK started to indicate that they would contest claims (even though they have plenty of invested capital to handle these interest/principal payments as they come due over the next many years) and hand the bag back to wall street/ratings agencies. As the ratings agencies have very little in the way of cash reserves, it's basically to the street-which some say could be on the hook for another $300B in writedowns. ABK will state that they have about $400m a year for the next few years in insurance premiums guaranteed, as well as around $1B of investment income annually for the next few years-and have 4X in reserves needed to pay this years maximum potential claims. Ex-unrealized losses and gains, their stock has around a $30/sh book value. Once the insurers, ratings agencies and wall street make a deal to get through this, they will and ABK will return to it's former glory within a few years. Short-term bankruptcy is out of the question, unless they are mis-reporting figures, or a new catastrophe arises.