Thank you for pointing me to the various sources. I had missed the January 30th letter. It certainly provides some corroboration for Ackman. I wish all of the assumptions behind the “Global Bank” loss analysis were outlined, but the security by security analysis is pretty convincing.

Thanks again.

I’ve provided links in other posts to Ackman’s 145 page Powerpoint presentation in late November, a 20 letter to regulators largely based on the analysis in the slideshow, and a 30 page January letter based on the model provided/developed by an unnamed Global Bank plus a listing of MBIA’s and Ambac’s 2005-2007 RMBS and ABS CDO. exposures. If you need the links again, let me know.

As for the substance of the argument: the banking industry once had accounting rules that gave them considerable latitude in how they marked their loans. In the stone ages of finance, pretty much the only reason to mark down a loan was default or serious arrearage, and regulators made banks report on past due account to make sure the reserves and writedowns were reasonable. But then we started having inflation, which introduced new risks, and the banks started writing more complicated loans and getting into more complicated instruments, such as swaps and derivatives. The accounting has always been playing catch-up to the regulation.

My impression, and it seems borne out by Ackman’s work, is that the accounting standards in insurance give companies vast latitude in how they value their risk exposures. In the case of the bond guarantors, they have entered into insuring instruments they clearly don’t understand (the rating agencies didn’t understand them, and I strongly suspect the insurers, like most market participants, relied unduly on the rating agency models). If the bond insurers didn’t and likely still don’t understand the risks (in fact, now they have an incentive not to; if they understood them, their failure to mark their values down would constitute fraud), it is a no-brainer that the regulators don’t either, hence the misleading accounting isn’t challenged.

Why do I assert that the accounting is misleadling, and the triple A is a fraud? Nowhere do you have an entites in such risky markets (look at the ABX indices) with so little equity (less than 0.7% of exposures). Even if the ABX indicies overstate how bad things are now, every informed real estate analyst projects that things will get worse.

So what is the insurance industry response to Ackman’s charges? Completely unconvincing. They basically say, “We’ve had very few losses to date, he’s an evil hedge fund guy with a short interest who doesn’t understand our industry.” The risks they held historically bear no resemblance to the business they’ve written in recent years, so the first argument is bogus. The second part is an ad hominem attack. There is no response to the substance, when Ackman marshals persuasive evidence. If he is so off base, it ought to be possible to say why.

The insurers are so unwilling to engage in facts that MBIA barred all critics from its latest conference call and took only questions submitted in advance.

Let me quote investor Scott, who is admittedly short, but has also sat in on company calls over the years:

….with regard to the WSJ article about MBIA, you certainly hinted at a key issue, but were perhaps a little more circumspect that I would have been.

I looked at the timeline the article portrayed, particularly with regard to those points at which the deterioration in their credit portfolio came more and more to management’s attention, and then thought back over their statements, both public ones, and ones made to analyst/investor friends, hedge fund buddies, in one on one meetings, and their management has been more or less lying through their teeth from early on in this whole unraveling….But in terms of the relative credibility of the two parties, I don’t have any question that Ackman has acted certainly with self-interest, but also with absolute integrity, and the MBIA’s been spinning, to be charitable about it, from the get-go.

What is the deal with the non-monoline OTC CDS? Presumably writers of CDS written on ABS-backed CDO’s ($14tr notional?) are deep underwater. Who are these guys? The investment banks show very little net exposure, so it has to be hedge funds and CDO’s of CDS (”synthetic CDO’s”). The latter, in turn, is owned by whom?

It seems to me that with all the focus on the monolines, the real insurance crisis — that of the OTC CDS market — is virtually ignored. Most of this insurance is on junk corporates, its true, but a bigger chunk was written on ABS-backed intstruments than MBIA and Ambac combined.

We’ve heard nothing on CDS write downs at hedge funds. Is this because they are not the writers of the insurance?

Look A Fed Slosh information:
http://www.gmtfo.com/RepoReader/OMOps.aspx

This guy has posted a few things of interest:

http://market-ticker.denninger.net/2007/12/year-in-review-and-look-ahead.html

These “repos” have a relatively short term (typically from one to 30 days) and when they expire, you are required to give The Fed back the cash, with, of course, interest. These “TOMOs” (or “Temporary Open Market Operations”) are conducted daily in the normal course of operation of the banking system. If the actual “trading rate” of overnight money between banks is too low, The Fed will either refuse to “roll over” some of the expiring TOMOs (thereby reducing the amount of “sloshing”, or free cash, in the system) or, if necessary, will actually do a reverse TOMO, effectively “putting” some of its Treasuries (that it holds itself) out into the marketplace.

“anyone who has looked at these companies in a serious way knows the AAA ratings… are a shame”.

I know this is now the conventionaal wisdom. That said, I have yet to see an actual discussion of defaults in the monoline portfolios that would lead to their becoming insolvent.

I’m not saying they are healthy. I’m just saying I would like to see the actual analysis backing up these statements. I’ve read certain PPershing reports in the past thaat I have found unconvincing. Certain reports, unfortunately not for public consumption, have been discussed on this blog. I would be grateful if you could point your readers to some analysis that is publicly available. I value the views expressed on this blog very highly, but there is no substitute actually judging the analysis for one’s self.