Comments on: On the MBIA, Ambac Downgrades; Regulatory Comments on MBIA

By: Frank

Frank — Fri, 20 Jun 2008 08:05:00 +0000

Buffet still has a very marginal role in the muni market; Berthshire Hathaway is mostly wrapping previously wrapped munis, and doing very little primary issuance. Buffet doesnt seem to be really scaling up his operations right now. His long term commitment to the industry is not very clear, as muni underwriting is profitable in the long run but does require to set up a large structure from the beginning (with a very small average deal size, smooth processing – in underwriting, risk management & back office – and economies of scale are essential). The muni market for monolines is likely to further shrink, and the last two AAA incumbents (Assured Guaranty and Financial Security Assurance) will probably keep their currentlarge market shares (we’re talking 50% for FSA right now for example), with Buffet at the margin. Both Assured and FSA were recently affirmed (hence attracting little media coverage) and seem to be now benefiting from their conservative culture. Other new players have confirmed their interest for the industry – notably Macquarie – but as with Buffet their long-term commitment is unclear (it’s an essential criteria in the ratings process).
On a side note Ackman publicly announced a couple of days ago he was going short on FSA in the CDS market. His bets against MBIA and Ambac gave him some credibility but this time he’s trying to catch a bigger fish since FSA is fully supported by Dexia (Belgian bank, possibly the largest public finance provider in the world). Will be interesting to see what comes next.

By: jason

jason — Fri, 20 Jun 2008 07:43:00 +0000

Hi Yves, I would like to know your opinion on mbia free cash situation. On their last 10q, it said if they are downgraded to A by moodys or sp, they would have about 8.4 billion in free collatorol left from the 16 billion. This is not including termination payments. If you assume they would have to pay as much termination payments as collatorol, that leaves about 2.4 billion. Even 8.4 billion is scarey enought. Isnt this garanteeing bankruptcy, since they have no ability to raise cash.

thankyou

By: Tom Lindmark

Tom Lindmark — Fri, 20 Jun 2008 05:42:00 +0000

Thanks.

Still have doubts about the ability of anyone to properly assess risk in this field given the opacity.

By: Yves Smith

Yves Smith — Fri, 20 Jun 2008 05:23:00 +0000

Tom,

Buffett has just started his muni insurance business and his initial insurance operation did reinsurance, which is a tough game. They are very disciplined and write business only when the returns look favorable. So even in the muni bond guarantee business now means bona fide risk assumption. Berkshire would still be a good candidate to pursue it. However, if history is any guide, they'd be highly selective.

And yes (and I confess I had forgotten about the pension liability issue, that's another biggie), this is NOT a good time to be making guarantees on muni credits. I'd trust Berkshire to be tough-minded enough; I'd be skeptical about anyone else.

By: Tom Lindmark

Tom Lindmark — Fri, 20 Jun 2008 05:11:00 +0000

A question for you since this isn't my field of expertise.

I understand the game that went on with the monolines and the muni bond business. It was basically a rigged game. But if the politicians are insisting that the same standards apply to corporate credits and government credits isn't that putting the new companies like Berkshire's insurance operations in jeopardy. As you mentioned in this post or one other, the credit quality of muni's is deteriorating and at least to my mind, they are not as transparent as corporates particularly on the pension liability side. Could this be the worst time to get into this business with the politicians looking over your shoulder?

Like I said, not my strong suit so your comments or others would be welcome.