http://www.mediafire.com/?9sp1ncywdl9

Re: anon @ 4:46 & the paper; nothing really too grat there; save your time by reading this paste:

The backtest procedure given by the Basel Committee described above has some
serious shortcomings. It assumes that under the null hypothesis the exceedances (et )T
t=1
are i.i.d. while empirical evidence shows a clustering phenomenon in the exceedances
(see, for example, Berkowitz and O’Brien (2002)).

The results indicate that this is indeed the case, and that, contrary
to common belief, expected shortfall is not harder to backtest than value-at-risk if we
adjust the level of expected shortfall. Furthermore, the power of the test for expected
shortfall is considerably higher than that of value-at-risk. Since the probability of de-
tecting a misspecified model is higher for a given value of the test statistic, this allows
the regulator to set lower multiplication factors. We suggested a scheme for determin-
ing multiplication factors. This scheme results in less severe penalties for the backtest
based on expected shortfall compared to backtests based on value-at-risk, and the cur-
rent Basel Accord backtesting scheme in case the test incorrectly rejects the model. In
case of a misspecified model the multiplication factors are on average about the same
for all tests. However, the multiplication factors based on the expected shortfall test are
smooth and have low variance.

There are newer better papers on backtesting, ill look around someday.

Ackman has done far and away the best analysis. He has provided the model, which he calls the “open source” model, to the SEC and the relevant state regulators, It contains, by name and CUSIP number, their CDO and RMBS exposures from 2005 to 2007. This is vastly more information than Ambac and MIBA provided (a friendly global bank put the data together the hard way) and therefore better information that the rating agencies or regulators have possessed heretofore.

He is encouraging everyone to combine their information. The regulators most certainly don’t have to report back to him. He wouldn’t be trying to force greater transparency if he wasn’t highly confident that it would work to his advantage.

Ackman has also said he will give the profits from his short position to charity.

From the letter:

•The Open Source Model allows users to evaluate the losses of inner CDO collateral by looking at the specific collateral underlying each individual inner CDO rather than by using generalized assumptions. By failing to analyze the specific underlying collateral of all inner CDO exposures, we believe that rating agency loss results are understated by billions of dollars as these additional losses typically impair the AAA tranches guaranteed by the insurers dollar for dollar.

•MBIA and Ambac’s exposure to nearly the entire universe of CDOs also compounds their exposure to many other classes of RMBS securities with MBIA and Ambac being exposed to 3,131 and 4,179 unique tranches of ABS respectively. These large numbers of exposures will likely cause MBIA and Ambac to experience losses similar to that of the entire RMBS market.

The era of collusion and corruption!!!

Berkshire Executives Knew AIG Would ‘Cook the Books,’ SEC Says

David Plumb
Bloomberg.com
June 8, 2005

June 8 (Bloomberg) — Executives at Berkshire Hathaway Inc.’s General Re unit knew four years ago that American International Group Inc. would use a reinsurance transaction to “cook the books,” according to phone transcripts cited in a suit from regulators.

John Houldsworth, a former General Re executive who this week agreed to plead guilty to a criminal charge of conspiring to misstate AIG’s finances, discussed the planned transaction in a November 2000 phone call with the insurer’s chief financial officer at the time, Elizabeth Monrad.

“They’ll find ways to cook the books won’t they?!,” Houldsworth told Monrad, according to a civil complaint the U.S. Securities and Exchange Commission filed on June 6 in conjunction with the plea agreement. The comment prompted Monrad to laugh, and then Houldsworth continued, “It’s up to them! We won’t help them to do that too much. We’ll do nothing illegal!”

The SEC said in court papers that Monrad and Houldsworth, as well as General Re Senior Vice President Richard Napier and former Chief Executive Officer Ronald Ferguson, knew what was intended by New York-based AIG, which last month corrected its accounting on that deal and an array of other transactions. Warren Buffett, the billionaire chairman of Berkshire Hathaway, in April said the company will be judged by whether it has “knowing participation” in the misdeeds of clients.

The transaction, which improperly boosted AIG’s reserves for claims, sparked an accounting investigation in October that last month led AIG to restate five years of financial reports and lower net income by $3.9 billion, or 10 percent. The deal also triggered AIG, the world’s largest insurer, to oust Maurice “Hank” Greenberg as chairman and CEO in March.

Warren Buffett’s Berkshire May Invest in Bond Insurer (Update4)
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahTDqHJRNIm4&refer=home

Buffett’s bond insurer
http://www.ft.com/cms/s/0/6223fe5a-be57-11dc-8bc9-0000779fd2ac.html

Berkshire Hathaway Finance sells $2 bln of notes-source
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0852400920080108

Very important catch, and thanks for pointing it out. Bloomberg is now on update 4 of the story, and the earlier headlines didn’t state, as they do now, that the $11.6 billion estimate applies to each.

It seems a little weird that two different firms with different business mixes and different sized balance sheets would have the same expected loss, which is why I made the mistake, since the prior work has come up with different estimates for each firm. But another reader had send me the letter that Ackman sent, and it does indeed say $11.61 billion for Ambac and $11.63 billion for MBIA “net par insured”; the MBIA losses rise to $12.56 billion if you include losses on certain reinsured risks (the reinsurance via Channel Re, MBIA’s captive, looks dodgy).

Thanks for the link, hope to get to reading the paper this evening.

RK,

Not aware of that, will mention it sometime. That is an important factiod.

eh,

Thanks for the typo alert, and yes, perhaps my wording was too oblique. The point is that if you believe Ackman’s numbers, the required bailout level isn’t $11.6 billion. It’s $11.6 billion plus a very large (and we don’t mean a billion or two) cushion.