Thursday, December 13, 2007

A Business I Never Understood-7

"Fitch Ratings says its business is providing the world with 'independent, timely, and prospective credit opinion.' Judging by its AAA rating on MBIA, it looks like Fitch is 0-for-3. ... Somebody here, please just state the obvious: if MBIA is a AAA credit, then Britney Spears is fit to rejoin the Mouseketeers. ... Maybe it should take this long to determine what the right rating is. However, nobody should need this long to figure out that AAA is the wrong rating, anymore than it should take weeks of testing to ascertain that I'm unfit to be quarterback for the New England Patriots. ... Last week, credit-default swaps tied to MBIA Insurance Corp.'s bonds were 193 basis points, according to data compiled by Bloomberg. In other words, it cost about $193,000 to buy a contract protecting $10 million of bonds from default for five years. ... Credit protection on another AAA-rated bond insurer under review, Ambac Assurance Corp., cost 289 basis points. ... By comparison, credit-default swaps for a real AAA company like Johnson & Johnson were 15 basis points. ... [MBIA] guarantees more than $650 billion of state, municipal and structured-finance bonds, compared with only $6.5 billion in shareholder equity. Big problems are hitting the subprime collateralized debt obligations it backs. [Sean Egan of Egan-Jones] estimates that MBIA needs to raise more than $4 billion of capital, it's stock-market value is just $3.8 billion. ... They're agencies only in the sense that they are agents of the companies that pay them for their ratings", Jonathan Weill (JW) at, 10 December.

With a 178 (193 - 15) basis point five-year differential between MBIA and J&J credit, did MBIA insured bonds fall by say 5.34% (1.78% X 3) assuming an average 15-year maturity? Just curious? Or did they not fall at all and the market "saw through" MBIA and its ilk all along? If they fell 5.34%, that's $35 billion ($650 X .0534)! Similarly, did Ambac's insured bonds fall 8.22% (2.89% - .15% = 2.74%; 2.74% X 3 = 8.22%)? There's a reason I never understood this business. I remember once reading an article in BusinessWeek that described insurance companies as Ponzi Schemes, i.e., they take in money up front in return for a promise to pay it back later. See also my 8 December post.

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