A bit late to this item due to the holiday. Bond insurer ACA, which was in breach of its collateral requirements last week and therefore en route to being liquidated, received a stay of execution from teh Maryland insurance regulator, which gave the company until February 19 to wind down existing credit default swap contracts.
Note this article also contains the first discussion I have seen of the notion of the need for the Fed to orchestrate a bailout of bond guarantors.
ACA Capital Holdings Inc., the bond insurer being run by regulators after subprime-mortgage losses, won a month’s grace to unwind $60 billion of credit-default swap contracts that it can’t pay.
ACA, under the control of the Maryland Insurance Administration, extended an agreement that waives collateral requirements, policy claims and termination rights until Feb. 19, the New York-based company said in a statement on Business Wire late yesterday.
The insurer said it’s working with trading partners “to develop a permanent solution to stabilize its capital position” after losses of $1.04 billion in the third quarter.
Standard & Poor’s cut ACA’s rating 12 levels to CCC last month, casting doubt on the company’s guarantees and triggering collateral requirements. ACA, which lost 97 percent of its market value in the past 12 months, caused Merrill Lynch & Co. to write down $1.9 billion of securities last week and Canadian Imperial Bank of Commerce to sell more than C$2.75 billion ($2.7 billion) in stock to cover writedowns.
Bond insurers’ shares plunged last week and credit-default swaps rose to a record on concern the companies may be unable to meet their obligations as the subprime-mortgage securities and collateralized debt obligations they guarantee slump in value….
The tipping point came last year when the three major rating companies downgraded thousands of CDOs. Ratings on more than 2,000 CDOs were cut in November alone, according to a Dec. 13 UBS AG research report.
Maryland Insurance Administration held off filing delinquency proceedings last month while ACA sought capital. ACA was required under its credit-default swap contracts to post collateral if its rating fell below A-.
ACA gained 2 cents, or 4 percent, to 48 cents in over-the- counter trading on Jan. 18 in New York.
“The monolines are dead, their business model is dead,” said David Roche, head of investment consultancy Independent Strategy in London. “The government is going to have to recapitalize this industry or there will be communities in the U.S. where they can’t even flush their toilets” because they can’t afford the services….
New York State Insurance Superintendent Eric Dinallo is examining whether to limit the types of debt that can be guaranteed by bond insurers, department spokesman David Neustadt said last week.
The Federal Reserve may need to organize a bailout, Nangle at Barings said. “More generalized monoline meltdown would be a situation that would require intervention by the New York Fed,” said Nangle. The regulator should “get all the banks into a room, have them open their books, and then lean on them to inject capital.”