Channel Reinsurance, a firm that reinsures securities for MBIA
SCA - Security Capital Assurance
XL Capital Assurance
XL Financial Assurance
Syncora
New York Insurance Commission - Company Regulator
Merrill Lynch Lawsuit
2008 0729 - Reuters - Dinallo sees bond insurer crisis closer to end, By Joseph A. Giannone - [link]
The bailout of bond insurer Security Capital Assurance solved one more piece of the credit crunch puzzle and brought more certainty to a critical part of the financial markets, New York Insurance Superintendent Eric Dinallo told Reuters on Tuesday.
Merrill Lynch & Co MER.N on Monday helped bail out Security Capital SCA.N by canceling $3.5 billion of credit default swaps (CDS) and withdrawing litigation.
SCA will be released from swap guarantees it sold to Merrill and will pay $500 million to the bank.
2008 0310 - CRS - Bond Insurers: Issues for the 110th Congress - 12p
2008 0809 - NYT - Naked Came the Speculators, By Gretchen Morgenson - [link]
At the urging of Eric R. Dinallo, New York’s insurance superintendent, Merrill Lynch agreed two weeks ago to unwind $3.7 billion of insurance it had bought on the mortgage-related obligations.
Merrill received $500 million from XL Capital Assurance to close out the insurance contract that its parent, Security Capital Assurance, had written.
There are several remarkable elements to the agreement.
First was its valuation: only about 13 cents on the dollar.
Because the value of the mortgage obligations covered by the insurance had crashed, it was shocking that the insurance was not worth far more than that.
But these deals are only as good as the party on the other side, and when Security Capital’s crucial credit rating was cut to junk earlier this year, the potential that the company would pay out on the arrangement dimmed.
⇒ The Merrill deal also represents a template for future arrangements intended to unwind C.D.S.’s, Mr. Dinallo said.
Indeed, on Aug. 1, the Ambac Financial Group, another bond insurer, unwound $1.4 billion in credit insurance it had written on mortgage-related securities at 61 cents on the dollar.
Still, Mr. Dinallo said, the valuations of C.D.S.’s remain absurdly optimistic on both the books of the bond insurers who wrote them and the companies who bought them.
As regulator in this particular poker game, he gets to see both parties’ hands.
Mr. Dinallo is pushing for similar arrangements with 13 other banks that bought credit default insurance from Security Capital.
It is easy to see why Mr. Dinallo wants these swaps off of insurers’ books.
As of last September, bond insurers had written some $656 billion in credit insurance on structured finance products.
Some $126 billion of that covers the kind of mortgage thingamabobs Merrill was trying to protect.
Yet the insurers’ resources to pay those claims stood at $54 billion.
2008 04 - NYT - Provisions cause surprise loss at Nomura - [link]
Nomura Holdings, the largest Japanese brokerage company, on Friday posted a surprise quarterly loss of $1.5 billion on its exposure to bond insurers and warned that it could still be at risk for further losses related to the credit crisis.
Nakada said the financial health of monoline insurers had deteriorated so much that they were not able to pay Nomura what they had guaranteed, forcing it to increase the provision.
2008 0618 - NYT - MBIA Debt Is Setting Up a Quandary, By Gretchen Morgenson - [link]
The risks associated with the vast, unregulated market for credit default swaps played a crucial role in the bailout of Bear Stearns.
Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.
But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company.
So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.
The acceleration clause is a standard feature in credit default swaps written by many bond guarantors, including Ambac and the Financial Guaranty Insurance Company.
The company said it had changed its thinking because S.& P. and Moody’s Investors Service, another rating firm, recently have indicated that a $900 million injection into its existing insurance subsidiary might not be enough for the unit to maintain its current high ratings.
But Joshua Rosner, an analyst at Graham-Fisher in New York, said, “It seems to me that if Jay Brown insists on putting the money anywhere other than at the insurance subsidiary or through a new subsidiary directly under it, he is making a very clear statement that he no longer believes in the viability of the insurance company to meet its obligations.”
The swaps’ acceleration clauses appear to be a factor in this bit of brinksmanship, although MBIA does not advertise their existence.
In a presentation about its first-quarter results, for example, MBIA said its “insurance contracts are not subject to acceleration.”
Mr. Dinallo said he would consider allowing MBIA to put the $900 million into a new company if it reinsured the municipal bonds in MBIA’s existing insurance unit.
But others are not so sure.
John Miller, chief investment officer at Nuveen Asset Management, a big municipal bond fund manager in Chicago, voiced skepticism about MBIA’s plans to start a new insurance subsidiary that could reinsure its existing portfolio.
“It would be surprising to me if it would be successful,” Mr. Miller said.
“It will still be an MBIA-insured bond and then reinsured also by MBIA, but MBIA as a new company.”
2008 03 - NYT -
2008 03 - NYT -
2008 03 - NYT -
2008 03 - NYT -
2008 0327 - NYT - U.S. bond insurer FGIC says its risk exceeded legal limits - [link]
IKB
"This is a bombshell," said Rob Haines, senior insurance analyst at CreditSights in New York.\
"They are actually in violation of New York insurance law.
If they don't remediate this, the state has the ability to take control of the company."
2008 0215 - NYT - Bond insurer plans to break into two companies - [link]
The bond insurer Financial Guaranty Insurance Co. is expected to apply to the New York State Insurance Department to separate into two companies, the regulator said Friday.
On Thursday, FGIC had its critical financial strength rating cut by Moody's to "A3" from "AAA." Bond insurers essentially need a "AAA" rating to book new business.
To maintain its top-caliber rating, Moody's said, FGIC needs to be able to access $9 billion. The company only has access to $5 billion, Moody's said.
Both Standard & Poor's and Fitch Ratings have already downgraded FGIC.
Fitch has also downgraded Ambac Financial Group and Security Capital Assurance, while Standard & Poor's has downgraded SCA. Moody's also lowered its ratings for SCA.
2008 0125 - Deseret News - Banks May Need $143 Billion for Insurer Downgrades - [link]
2008 0125 - Bloomberg -
<WishList> - 203. The January 25, 2008 Bloomberg article stated, in part: Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Assurance Corp. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Barclays’ estimates are based on banks holding as much as 75 percent of the $820 billion of structured securities guaranteed by bond insurers.
2008 0216 - NYT - A Split-Up of Insurers of Bonds Is Considered - [link]
“It takes the whole thing out of the hypothetical and into reality,” Eric R. Dinallo, the New York State insurance superintendent, said in a telephone interview.
On Thursday, he and Gov. Eliot Spitzer told Congress that they were considering encouraging a split in the insurance portfolios as a last resort.
(MBIA and Ambac officials still assert that they have enough capital to cover future losses, which they say their critics have exaggerated.)
If MBIA and Mr. Dinallo remain at odds over whether the company needs to do anything, the dispute could end in court, legal experts say.
Mr. Dinallo has significant power as superintendent to take control of insurers if he believes there are not enough assets to pay claims by policyholders, but the company and its policyholders can fend him off if they can prove his decisions are “arbitrary and capricious,” said Francine L. Semaya, an insurance lawyer at the law firm of Cozen O’Connor.
Mr. Dinallo said on Friday that the negotiations with MBIA had not progressed as far as the talks involving Ambac and Financial Guaranty.
“I feel optimistic that this Ambac consortium is doing real work they are engaged,” he said. “I am optimistic that they will come to a private-side economic solution.”
2008 0218 - NYT - Arcane Market Is Next to Face Big Credit Test, by Gretchen Morgenson - [link]
Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago.
But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.
And last week, the American International Group said that it had incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated.
Its stock dropped 12 percent on the news but edged up in the days after.
“This is just a giant insurance industry that is underregulated and not very well reserved for and does not have very good standards as a result,” said Michael A. J. Farrell, chief executive of Annaly Capital Management in New York. “I think unregulated markets that overshadow, in terms of size, the regulated ones are a real question mark.”
Because these contracts are sold and resold among financial institutions, an original buyer may not know that a new, potentially weaker entity has taken over the obligation to pay a claim.
Credit default swaps were invented by major banks in the mid-1990s as a way to offset risk in their lending or bond portfolio.
At the outset, each contract was different, volume in the market was small and participants knew whom they were dealing with.
Officials at the International Swaps and Derivatives Association, a trade group, say they are confident that the market will stand up, even under stress.
But financial history is rife with examples of market breakdowns that followed the creation of complex securities. Financial innovation often gets ahead of the mechanics necessary to track trades or regulators’ ability to monitor the market for safety and soundness.
But 16 percent were created to protect holders of collateralized debt obligations, complex pools of bonds that have recently experienced problems because of mortgage holdings.
There is no exchange where these insurance contracts trade, and their prices are not reported to the public.
Because of this, institutions typically value them based on computer models rather than prices set by the market.
Neither are the participants overseen by regulators verifying that the parties to the transactions can meet their obligations.
2008 0220 - NYT - Bond Insurers Claim Conflict in Buffett’s Moody’s Link, Report Says - [link]
2008 0221 - NYT - Ackman Proposes Plan for Bond Insurers - [link]
On Tuesday, MBIA‘s newly appointed chief, Joseph W. Brown Jr., told The New York Times that he would consider splitting MBIA into two parts.
2008 0222 - NYT - Bond Insurer MBIA Pulls Out of Trade Group
2008 0222 - NYT - Report on Potential Ambac Bailout Reverses Stock Slide - [link]
The plan, drafted by a consortium of eight banks including Citigroup and UBS, still needs approval by the credit ratings agencies but could be formally unveiled as soon as Monday.
But that seemed to reverse sharply late that afternoon after CNBC’s Charles Gasparino reported that a deal to save the triple-A rating of Ambac Financial, the second-largest bond insurer, was near.
That move, which has also been suggested in different forms by the New York insurance superintendent, Eric R. Dinallo, Berkshire Hathaway’s Warren E. Buffett and a short seller, William Ackman, would shield municipalities against defaults in the structured finance business.
It would also help preserve the credit ratings of the municipal business, keeping the cost of borrowing lower for local governments and the like.
Analysts like Meredith Whitney of Oppenheimer Research have estimated that banks could suffer as much as $75 billion in additional charges if bond insurers are downgraded.
According to CNBC, New York’s insurance department believes that both Ambac and its larger rival, MBIA, have enough assets to cover losses stemming from their insurance of CDOs.
But the bigger question is whether those companies will suffer downgrades — and whether they can attract new business, as many municipalities can by law hold only triple-A-rated securities.
2008 0226 - NYT - New Outlook on Bond Firms Ignites Rally - [link]
The credit-rating firm Standard & Poor’s helped incite a broad stock rally in the afternoon when it affirmed the triple-A ratings of MBIA and Ambac Financial, the two bond guarantors, saying the companies have made progress in raising capital and restructuring their businesses.
Since late last year, investors have worried that a downgrading of MBIA or Ambac could generate losses across Wall Street, because many investment banks and other large investors are counting on the firms to back bonds they own.
On Monday, Fitch Ratings, another rating firm, said a downgrading would be generally “manageable” but would severely pressure three banks that have struggled with big write-downs on mortgage-related securities: Citigroup, Merrill Lynch and UBS.
Even as investors looked forward to the end of the turmoil surrounding the bond guarantors, there were signs that some companies remained troubled.
On Monday, S.& P. downgraded the credit ratings of three other insurers, Financial Guaranty Insurance, XL Capital Assurance and XL Financial Assurance.
And on Friday, Moody’s downgraded Channel Reinsurance, a firm that reinsures about $43 billion of securities for MBIA, to Aa3, from triple-A.
2008 0229 - NYT - A Freaky Friday for Bond Insurers - [link]
By taking a big stake in Assured, a smaller bond insurer but widely regarded as rock-solid, Mr. Ross said that the firm would be able to expand its reinsurance business.
It has already agreed to reinsure $29 billion worth of securities in Ambac’s portfolio; Bloomberg News says that move will free up $225 million in capital for the beleaguered Ambac.
2008 0214 - NYT - Large U.S. bond insurer balks at bailout plan - [link]
New York State regulators are working with bond insurers and banks to ease financial strains in the bond insurance industry that government officials say threatens to hurt communities, individual investors and the wider economy.
But an official of MBIA, one of the biggest bond insurers, said in testimony to a panel in the House of Representatives that a rescue plan was unnecessary.
The chairman of Ambac Financial Group, Michael Callen, said "stable and predictable" credit ratings by the agencies are needed to restore confidence in the industry.
2008 0214 - NYT - MBIA to Call on Congress to Rein in Ackman - [link]
In written testimony for a subcommittee of the House Committee on Financial Services, MBIA said that short sellers like Mr. Ackman, founder of the hedge fund Pershing Square Capital Management, have worked hard to undermine market confidence in the bond insurers.
MBIA said lawmakers should help restore confidence in the bond insurers, because their failure could have far-reaching effects on the U.S. and global economies.
MBIA also included as an appendix a timeline of actions by Mr. Ackman, and to a lesser extent by other short sellers.
Mr. Ackman, who is also expected to testify before the committee Thursday, has persisted in challenging MBIA’s AAA credit rating for more than five years, saying MBIA hasn’t been forthcoming about backing risky financial instruments such as those based on loans to the least creditworthy homebuyers.
The war of the words comes as the three major U.S. credit rating agencies are deciding whether MBIA has enough funds to keep its AAA rating.
Eliot Spitzer, New York’s governor, is expected to testify at the same hearing that the current turmoil could lead to a “financial tsunami that causes substantial damage throughout our economy.”
According to The Bond Buyer, Mr. Spitzer — whose insurance regulator, Eric Dinallo, is attempting to help bail out the bond insurers — will argue that state regulators, banks and ratings agencies can shore up the bond insurance industry without resorting to a federal regulator.
For his part, Mr. Dinallo will propose letting the bond insurers split their principal municipal bond guarantee businesses from the problematic business of insuring complex debt instruments, Reuters reported.
Mr. Ackman has urged Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke to abandon the idea of a bank-led rescue plan, arguing that it would “prolong the term and severity of the recent credit contraction.”
Mr. Ackman, however, had at least one backer in his corner. MarketWatch columnist Herb Greenberg roundly chastised MBIA for calling on Congress to rein in Mr. Ackman’s practices.
“[R]ather than accept the reality that it caused its own problems with bad business and actuarial decisions, MBIA is complaining to Congress about the guy who blew the whistle, Mr. Greenberg wrote.
“Seems that rather than crucify him, they should give him the Congressional Medal of Honor.”
2007 1123 - NYT - French Banks Acquire Bond Insurance Company - [link]
The banks, Groupe Banque Populaire and Groupe Caisse d’Epargne, paid $1.5 billion to take ownership of CIFG Holding from Natixis, a French banking company in which each bank holds a 34 percent share.
2007 1219 - NYT - Banks Study Bailing Out Struggling Bond Insurer, By Vikas Bajaj and Gretchen Morgenson - [link]
ACA Capital Holdings
The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds.
It is unclear how much capital it would take to shore up ACA. Another solution the banks are discussing would relieve ACA of having to post collateral against its insurance contracts if the company is downgraded.
Investment banks, hedge funds and insurance companies often use credit default swaps to bet on or against bonds without trading the underlying securities.
Warren E. Buffett and other critics have described the contracts as financial time bombs, because they say that traders often misprice risk of default and do not set aside enough reserves to cover claims.
2008 0124 - NYT / CNBC - Officials Move to Rescue Shaky Bond Insurers - [link]
2008 0124 - Reuters - US CREDIT-Ambac, MBIA CDS rally may be short-lived - [link]
Any plan to help bond insurers will take “some time” because of the complexity of the issues and the number of parties involved, New York State Insurance Superintendent Eric Dinallo said in a statement on Thursday.
Yesterday, New York’s insurance regulator pressed major Wall Street banks to put up billions of dollars to support the bond insurers, which guarantee interest and principal on $2.5 trillion of bonds.
2008 0125 - The Economist / CFO.com - Buddy, Could You Spare Us $15 billion?: Another shady realm of finance goes begging for a massive bail-out., Economist Staff -
A lifeline for the monolines
No wonder, then, that a group of banks is giving ear to a request from New York’s insurance regulator, Eric Dinallo, who oversees some of the big monolines, to discuss a possible rescue.
In preliminary talks held on January 23rd, Mr Dinallo reportedly asked the banks to stump up as much as $15 billion to help MBIA and Ambac preserve their ratings.
The regulator, who apparently has the blessing of federal officials, is talking to other potential investors too, said to include Wilbur Ross, a vulture investor, and Warren Buffett’s Berkshire Hathaway, which recently set up its own bond insurer and has not ruled out buying part of a troubled rival.
2008 0129 - Reuters - NY bond insurer bailout plan too late-CreditSights, By Dan Wilchins, Karen Brettell - [link]
New York State Insurance Superintendent Eric Dinallo is working with banks to figure out how to rescue the industry...
But analysts at research firm CreditSights write that multi-step downgrades are a real possibility now, because rating agencies are setting high capital requirements high and the public markets for raising capital seem closed to the bond insurers now.
2008 0228 - FT (Financial Times) - Markets assess the costs of a monoline meltdown, Gillian Tett - [link]
The potential implications are so severe that Eliot Spitzer, governor of New York, warned last week that if the authorities did not soon produce effective action to address the monoline problem, the consequence “could be a financial tsunami that causes substantial damage throughout our economy”.“
All of a sudden, the world has been gripped by monoline fever,” observed a recent report from Citigroup, the investment bank.
It says that investors are now scrambling to see if the monoline problems are the next example of the “glue which holds together the world financial system” coming apart.
However, the chain reactions extend well beyond Wall Street.
Or as Congressman Spencer Bachus, the Republican representative for Alabama, puts it: “Unlike other events that have destabilised markets since the credit crunch began last summer – where the pain has been felt largely on Wall Street – the fallout from the troubles in the bond insurance industry is already hitting Main Street.”
Indeed, Eric Dinallo, the New York insurance superintendent, admits that regulators have failed fully to comprehend the link between ratings and the guarantees from bond insurers.
As a result, regulation will be reformed to focus on ratings rather than on solvency, he says.
“This [bond insurance] might be the only area of insurance where the ratings are as important as the solvency,” he says.
In the short term, however, the more immediate problem for policymakers is how to prevent the chain reaction inside the financial sector from extending even further.
But the monoline issue has raised anxiety about whether other counterparties in the CDS world, such as hedge funds, will be able to honour their contracts if corporate defaults rise.
While the International Swaps and Derivatives Association, the main trade body, vehemently insists this risk should be offset by the fact that most trades are backed by collateral, levels of investor unease are nevertheless rising.
However, as the Bank of England observed, what the US mortgage market and corporate debt world have in common is that lending standards have crumbled in recent years – partly because banks have been repackaging this debt and selling it on to investors rather than holding it themselves.
Today, private equity firms wanting to buy companies have begun writing equity cheques for the whole thing, reasoning that they can eventually go to the debt market to refinance, according to Doug Warner, a lawyer at Weil Gotshal & Manges in New York.
But the main ghost haunting the market is the uncertainty about the economy. If the economy really slows dramatically, corporate cash flows will dry up.
Then, companies with heavy debt burdens will find it even harder to pay their debt – creating even more trouble ahead.
2008 0202 - NYT - 8 Banks Discuss Aid for Bond Insurer - [link]
Ambac is in more dire financial straits than its larger rival, MBIA, which has raised $1.5 billion in recent weeks.
MBIA and Financial Guaranty are regulated in New York by Mr. Dinallo’s office.
Ambac is regulated in Wisconsin.
The insurance commissioner for that state, Sean Dilweg, said on Friday that he was confident that the company was in sound financial health but was working with the company “as it develops and implements its business plan in response to the current market conditions.”
“For the protection of policyholders, Wisconsin has substantial financial requirements pertaining to municipal bond insurers,” he said in a statement.
“Ambac meets and exceeds all these statutory requirements.”
Ambac disclosed in a regulatory filing Friday that it was granting cash bonuses of $700,000 to $800,000 to four senior executives.
2008 0208 - NYT / By Bloomberg News - MBIA Sells Stock to Aid Rating and Raises $1 Billion - [link]
MBIA has raised about $2.5 billion since November, and it said that it would contribute most of the proceeds to its insurance company.
Warburg Pincus already bought $500 million of MBIA stock this year.
MBIA also sold $1 billion in surplus notes and cut its dividend by 62 percent.
2008 0213 - NYT - Ambac Financial rejects Buffett's bond insurer bailout - 13p
Ambac Financial Group, the first bond insurer to lose its triple-A credit rating amid the U.S. mortgage market collapse, rejected an offer by Warren Buffett to hand over control of the company's municipal-bond business.
Ambac, MBIA and other bond insurers are reeling largely from an expansion beyond their traditional municipal-bond insurance businesses into guaranteeing riskier structured-finance products including mortgage-liked securities and collateralized debt obligations, or CDOs.
CDOs repackage such assets as mortgage bonds and buyout loans into new securities with varying risk.
2008 0214 - GOV (House) - The State of the Bond Insurance Industry, Paul Kanjorski (D-PA) --- [BonkNote]
1966 0216 - NYT - Grand Jury Indicts Eight In Bonded Mortgage Case, American Bonded Mortgage Company - [link] --- 1p
1966 1223 - NYT - Seven Found Guilt of Securities Fraud, American Bonded Mortgage Company - [link] --- 1p
The Securities and Exchange Commission charged the seven misled the investors by promising to guarantee their principal, plus a 7 to 8 per cent profit.