Egan Jones: Bond Insurers Need $200 Billion to Retain AAA

Bill Ackman of hedge fund Pershing Square has gotten a considerable amount of flack for his outspoken, negative views of the bond insurers, particularly MBIA and Ambac, which his firm has shorted. Ackman has been circulating a detailed analysis that estimates that the additional equity needed to maintain an AAA rating at the two biggest firms is roughly $15 billion.

This calculation is sharply contested by new rating agency Egan Jones (which also downgraded MBIA to a B+, a junk rating) which says the industry needs more than an order of magnitude more capital, namely $200 billion.

What is a bit scary is that Ackman gave his findings to New York insurance superintendent Eric Dinallo an unstated amount of time before the presentation of the report at an investor conference in late November. Dinallo contacted Warren Buffett in November about getting into the muni bond business because he recognized the monolines might have trouble writing that business. One has to wonder whether the timing had anything to do with the Pershing Square briefing.

Similarly, Dinallo is trying to raise $5 billion immediately, $15 billion longer term to shore up the bond insurers. The $5 billion seems driven by the rating agencies’ immediate demands; the $15 billion is, shall we say, preternaturally similar to Pershing Square’s estimates.

Now we have a rating agency, which no doubt enjoyed far greater cooperation and access (and presumably insurance industry expertise, which Pershing Square lacks) coming up with a vastly higher estimate. Why is that so troubling? Because it appears the regulators themselves either have no estimates of their own, or lack confidence in them and were therefore influenced significantly by the Pershing Square analysis. In other words, the regulators may be completely clueless.

From the Times:

America’s biggest mortgage bond insurers collectively need a $200 billion (£101 billion) capital injection if they are to maintain their key AAA credit ratings, a figure that dwarfs a plan by New York regulators to put together a capital infusion of up to $15 billion, a leading ratings expert said yesterday.

The failure to maintain their AAA ratings will lead to a further round of multibillion-dollar writedowns among the Wall Street banks and other large owners of the bonds, Sean Egan of Egan Jones Ratings Company, said. It would also push some of them into receivership, Mr Egan added.

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  1. Anonymous

    Yves, I’m not entirely convinced Egan-Jones has benefited from cooperation and/or access. If anything, I suspect the opposite is the case: what benefit would a company derive from spending quality time with E-J vis-a-vis investors or the Big 3 agencies? I do, however, think they’ve benefited from not having the same conflicts of interest as their rating-agency peers, as well as from not having the “downgrade=disaster” albatross around their necks because pension funds etc. don’t have E-J ratings incorporated into their investment policies or guidelines.

    What seems clear from the Pershing Square analysis is that, whether they’re talking their book or not, they’ve given a lot of thought to all of the nuances surrounding the monolines – the nuances which just weren’t deemed relevant by the agencies when the monolines were only insuring munis, or when real estate was in a bull market and CDO losses were unthinkable. Ackman’s been short the monolines for, what, 5 years? I’m guessing he knows the industry better than almost anyone – and, sadly, that’s likely to include insurance regulators, who are (understandably) used to assessing identifiable risks like, say, death.

    That said, you are doing a tremendous service with your coverage of this debacle. I’m clearly not alone in this sentiment.

  2. doc holiday


    I think I found the money on the sidelines; this is amazing really!!

    Retail: Assets of retail money market funds increased by $12.09 billion to $1.196 trillion. Taxable money market fund assets in the retail category increased by $13.06 billion to $906.85 billion, and tax-exempt fund assets decreased by $975 million to $289.49 billion.

    Institutional: Assets of institutional money market funds increased by $52.33 billion to $2.055 trillion. Among institutional funds, taxable money market fund assets increased by $52.16 billion to $1.873 trillion, and tax-exempt fund assets increased by $177 million to $182.36 billion.

  3. Independent Accountant

    I was first exposed to the monolines in July 2002 when Ackman published a 66-page piece on MBIA. After over five years of studying this industry, I suspect he knows it better than the regulators. That the regulators don’t have a clue what they are doing is old news. If they did, they would not have chartered the monolines in the first place!
    Whether the monolines need $15 or $200 billion isn’t important. What is: their business model makes no sense and never made any sense and they should be permitted to die an undignified death with the Big Three raters not far behind.

  4. Yves Smith


    Yes and no. $15 billion is on the outer edge of doable if the Fed were to knock heads (which it won’t). $200 billion is an obvious complete non starter. And if the number really were any bigger than $15 billion (even a not-that-much-bigger $25 billion), this rescue discussion goes away.

    So to me, the $200 billion is worth airing because it raises two questions: how far is the downside and it is worth having the officialdom spend any time trying to salvage them? The answers are crystal clear if meaningful elements of Egan’s even more dire view are correct (I think they should be clear even at $15 billion, but I seem to be in the minority).

  5. F. Krull

    While I hate off post comment, The following needs saying. In it’s first (H of R) incarnation, the stimulus package includes a “temporary” increase
    in the GSE limits on mortgages they can buy, going from $412,500 to $735,000. UNBELIEVABLE!
    It was the 9% compound average increases (from 2002 to 2007) in GSE limits that got us to $412,500, and helped enable the housing bubble in the first place. That during a time when so called core inflation was “well contained” at around 2%. Any guss as to how “temporary” it will be?

  6. Anonymous

    Sick and tired of the phony books and the games. Time for the U.S. to get their garbage in order and let go of the notion that investors are stupid and will buy any junk you throw together. The U.S. has fallen from grace to become a bunch of scam artists. Death to the system!!!!!

  7. donebenson

    The FT’s Alphaville a couple of days ago quoted an RBS analyst as saying the monolines had insured about $500 billion of CDO’s. I would think the losses on those CDO’s would greatly exceed $15 billion.

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