I told you so, AGO

For those who are new to the blog, I have had heavy short positions and a lot of research performed on the monoline insurers as far back as the 3rd quarter of last year. It has paid off handsomely, despite the fact that many pundits had argued, tooth and nail, against my findings. Well, the market has spoken, and all of the monolines negatively blogged have reached the ending that I anticipated, if not worse. The business models just do not make sense for the derivative markets.

See my AGO primer and the full forensic analysis. These are some of my comments on the other monolines last year when they were trading in the 60's and 70's:

1. A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
2. Tie-in to the Halloween Story
3. Welcome to the World of Dr. FrankenFinance!
4. Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion
5. Follow up to the Ambac Analysis
6. Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibili
7. More tidbits on the monolines
   
8. What does Brittany Spears, Snow White and MBIA have in Common?
   
9. Moody's Affirms Ratings of Ambac and MBIA & Loses any Credibility They May Have Had Left
10. My Analyst's Comments on MBIA/Ambac/Moody's Post
11. As was warned in this blog, the S&P downgrade of a monoline insurer reverberated losses through c

Here is a blurb from Bloomberg regarding AGO's price movement today:

 Assured Guaranty Plunges, Bond Risk Soars on Review (Update1)

By Christine Richard and Shannon D. Harrington - Assured Guaranty Ltd., one of two bond insurers with a AAA ranking from the three major ratings companies, fell as much as 58 percent in New York trading after Moody's Investors Service said it may downgrade the firm.

The cost to protect against a default by Assured Guaranty soared to a record. Credit-default swaps on Financial Security Assurance Holdings Ltd., the unit of Europe's Dexia SA that was also placed under scrutiny by Moody's, also rose to a record.

Moody's review is a blow to Hamilton, Bermuda-based Assured Assured Guaranty and Financial Security of New York, the only two bond insurers to maintain their top ratings as losses in the industry crippled competitors. The companies are dominating new municipal bond insurance and seeking to fend off Warren Buffett, whose new bond insurer was awarded a Aaa rating. Without a Aaa stamp, former market leaders MBIA Inc. and Ambac Financial Group Inc., have seen their new business plunge.

``Potentially all the legacy companies are gone now,'' said Rob Haines, an analyst with CreditSights in New York. ``It has huge implications for the municipal bond market and for banks that may have to take another round of writedowns. It's just a mess.''

What makes this interesting is that there are now (or soon will be), no more Aaa rated insurers that will wrap derivatives. These wraps are what the commercial, mortgage and investment banks relied on to get AAA rated ABS and MBS securities, CDOs, CLOs etc. To put this in other words, its curtains for all of those products that didn't take a big haircut due to their alleged superior "investment grade" status. These banks, as I type this, are currently rallying as they have been doing for the last few days. One would think that the SEC should be doing something about this problem in lieu of trying to administratively discourage short sellers on a few favored stocks. The fundamentals sucked before, I won't even lower myself to the levels of vulgarity needed to describe what they are now. GSE AAS rated debt, hah! Super senior AAA wrapped tranches, hah ha ha hah!

Comments (4)

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JKD: ...

Well done as usual Reggie, that didn't take very long. I expected at least a six month wait after the MBIA and Ambac downgrades. These ratings companies are really picking up the slack!

Can you believe the short covering in PNC?? Considering this is one of the supposedly 'safe' regionals I am a little surprised at the ramp job. It is now within 10% of its all time high, impressive.

John

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July 22, 2008
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kcdallas23: ...

What action today in the market. Unreal! I will hold back my comments on the B.S. happening right now. One thing I did see which should draw as much attention as the shorts are getting - but we all know this will fall on deaf ears to manipulate the markets further and here is why:

The HBOS rights offering FAILED BIG TIME. Nobody stepped up to buy that crap. 10% of the offering was taken and people said - adios to the the rest of the shares. Possibly people are catching on??? So, DB and MS (the risky bank) have been STUCK with picking up the rest of the shares. $5 BILLION worth!!!! Yea.... that's gotta SUCK. So if they start complaining about it, what does that tell you? Yes, you shouldn't be buying this crap either. Now, for the really interesting announcement today....

Take a look at this "Analyst's" views on WB and banks. Hmmmm.... news out today from a DB Analyst, when DB just got STUCK on the rights offering of HBOS? Ok, let's focus on short selling and let this B.S. go unchecked!!!! While I'm at it, where is the enforcement to get companies to disclose the HIDDEN accounting (yet legal) smoke and mirror games on these calls? I wonder if the questions on the calls are set up ahead of time - not to allow time for the right people to ask the right questions? So, it's OK to manipulate earnings that drive up stocks along with help from the SEC, Paulson, etc.... but hey... shorting is BAD for stocks and the "Long" holding stock positions. Since when did selling S..t companies because they're S..t earnings become so wrong? Whatever. Trade what you got and not what you hope for (or what should be). This B.S. makes it tough to trade against a stacked position, but yes.... time will come and it will right itself. You can't dress up S..t in a Baby Ruth candy bar wrapper and call it candy for too long. Eventually, somebody will open the wrapper!!!!

DB article below.... from Bloomberg:

Deutsche's Mayo `Not as Negative' on Bank Earnings (Update1)

By Josh Fineman

July 22 (Bloomberg) -- Deutsche Bank AG analyst Mike Mayo is reducing the degree of underweighting on the banking group after becoming less ``negative'' on the companies' earnings.

Mayo upgraded Citigroup Inc. to ``hold'' from ``sell'' and reiterated his ``buy'' rating on Wachovia Corp. He's become less negative as banks report second quarter results without raising fresh capital, margins better than expected and ``problems have not spread as much as feared,'' he wrote in a note to clients today.

``Real estate problems remain significant, but outside these areas problems have not yet spread in score or severity as much as feared,'' Mayo wrote. ``Bad results are good when expectations are so low.''

Wachovia today reported a record quarterly loss of $8.9 billion, slashed its dividend and announced 6,350 job cuts. Citigroup last week reported a smaller-than-estimated loss on fewer mortgage-bond writedowns, lowering borrowing costs and job cuts.

Wachovia rose $3.61, or 27 percent, to $16.79 at 4:01 p.m. in New York Stock Exchange composite trading. Citigroup climbed $1.20, or 6.1 percent, to $20.89.

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July 22, 2008
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Reggie Middleton: Yeah I was amazed at the aggression of the upward movement as well

The first thing that ran through my mind was the word "manipulation" as well. Wachovia is rallying and the actual earnings report was absolutely horrendous, and I don't mean just bad. They also missed the consensus, for all that means (you knwo how I feel about the consensus games).

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July 22, 2008
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Anonymous: ...

Reggie, I think your forensic analysis is missing the details of the Moody's press release. After all, Section 9 of your series (link above) highlights that Moody's has lost all credibility. In the press release, they note that AGO would still have OVER $100 MILLION ABOVE the minimum threshold for a Aaa rating of 1.3x the losses in Moody's "stress" scenario. This was the standard that Moody's had been using since last fall, when they had to furiously backpedal after having so many subprime CDOs blow up despite their supposed "Aaa" rating. So AGO still has over $100 MILLION more than they need. Why should there be a negative watch? What's the catalyst when they already exceed the previously articulated standards?!?

Thisis clearly Moody's pulling a CYA, moving the goalposts on what it takes to be Aaa, without any advance warning to the company. Moody's also makes B.S. arguments such as, "since the volume of bond insurance is lower, there are greater risks." That's just B.S. All insurance companies have always been rated on their CURRENT ability to withstand losses on policies, REGARDLESS of future conditions. It shouldn't matter one iota to their credit rating if any insurer writes one more policy -- they should have the proper amount of capital reserved already.

Finally, they are clearly applying a double standard to Berkshire Hathaway Assurance Corp. Here's a firm with P&C and reinsurance experience, which is somewhat applicable, but with ZERO market share, that debuts at a Aaa rating. What about the smaller pie of future bond insurance opportunities? What about stress-testing its (non-existent because so new) portfolio? Is it any surprise that Berkshire owns 20% of Moody's already?

Disclosure: long FSA and AGO insured bonds with investment-grade underlying ratings independent of insurance.

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July 25, 2008
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