Displaying items by tag: Insurers and Insurance

Thursday, 17 January 2008 05:00

As was warned in my previous monoline posts...

Back in October/November, I wrote a comical critique of MBIA and the big three ratings agencies. In it, I noted how absurd the relationship between MBIA and its reinsurer was, considering it was formed specifically to insure MBIA debt, holds a silly level of concentrated risk, and worse of all - is owned (17%) by MBIA itself. Well, finally I got someone to read my blogLaughing.

In my November writeup (from October research notes), I stated:

Relation between MBIA and Channel Re

Channel Re is a Bermuda-based reinsurance company established to provide 'AAA' rated reinsurance capacity to MBIA. Renaissance Re Holdings Ltd, Partner Reinsurance Co., Ltd, Koch Financial Re Ltd and MBIA Insurance Corp are the investors in Channel Re. MBIA has a 17.4% equity stake in Channel Re and seeded Channel Re with the majority of its business. Channel Re has a preferential relationship with MBIA.

Channel Re has entered into treaty and facultative reinsurance arrangements whereby Channel Re agreed to provide committed reinsurance capacity to MBIA through June 30, 2009, and subject to renewal thereafter. Channel Re assumed an approximate of US$27 bn (par amount) portfolio of in force business from MBIA Inc and has claims paying resources of approximately US$924 mn. (source Renaissance Re 10K. Swapping Paper Losses Channel Re is insulated against huge losses because of adverse selection in terms of pricing and risk on the assumed portfolio of MBIA. The agreement between the Channel Re and MBIA protects channel Re against any major losses. This financial reinsurance scheme smells a little fishy.

Is MBIA dumping mark to market losses on Channel Re through reinsurance contracts?

The SEC and the NYS Insurance Dept. thought so. In addition, there is overlapping risk retained through the relationship - MBIA has an equity investment of 17.4% in Channel Re. Channel Re assumes 52.37% of the total par ceded by MBIA of US$74 bn. The total par ceded not covered through reinsurance contracts due to the equity investment of MBIA in Channel Re is US$6.7 bn. Thus, there is a little under $7 billion dollars of risk that many think MBIA is covered for that it really is not. Then there is the case of diversity of Channel Re's portfolio. I have a slight suspicion that MBIA's business makes up much too much of it to be considered well diversified. Rennaisance Re, the majority owner, has also come clean admitting that Channel Re has a very high exposure to CDO losses and mortgage backed securities. Uh oh! This admission came from the extreme losses Channel Re took last quarter due to mark to market issues for mortgage backed paper. Again, is MBIA doing the old financial reinsurance scheme that was outlawed not too long ago? My gut investor's feeling tells me...For those not familiar with the reinsurance game, here is a primer on financial reinsurance.

Now, today and nearly three months later) from Reuters:

Bermuda reinsurers RenaissanceRe Holdings Ltd and PartnerRe Ltd said on Wednesday they will write off 3-year-old investments in Channel Re, a reinsurer formed solely to do business with MBIA Inc , the world's largest bond insurer.

The announcement comes after Channel Re notified the companies that fourth-quarter losses stemming from its business with MBIA are expected to exceed its shareholders equity.

RenRe said its investment in Channel Re carried a value of $126.7 million at the end of September. PartnerRe said it would take a $74 million fourth-quarter charge, equal to about $1.31 per share, to write down its investment.

Reinsurers effectively insure other insurers, spreading the risk of losses among more than one party.

Channel Re expects $200 million in credit impairments from a $3.3 billion mark-to-market charge at MBIA, according to Partner Re's statement.

David Lilly, an outside spokesman for RenRe, declined to comment further on the Channel Re development. PartnerRe could not immediately be reached for comment.

Rising defaults in mortgage-related bonds have threatened to wipe out a significant amount of capital for bond insurers such as MBIA, putting ratings under threat of downgrade.

Published in BoomBustBlog
Wednesday, 16 January 2008 05:00

Ambac Management Should Read Blogs More Often

I was going to post an update on the Bear Stearns and GGP work, but since there was such adverse price action in Ambac stock I decided to follow up on that - again. So, here we go. If you are new to the blog be sure to click, follow and download all the links. They are worthwhile. If you are a regular to my monoline musings, at least download the following pdf link. It is new, and worth a quick reading. Feel free to email it and pass it around as well. I annotated a FAQ directly off of their site.

From the Ambac.com FAQ about 2 1/2 months ago

See first line of page 2 here: pdf ABK FAQ 12/26/07 - Reggie Annotated.

Question Category
Does Ambac have any plan to reduce the amount of its dividend? LIQUIDITY
Answer
Ambac does not currently anticipate reducing its common stock dividend.
Updated as of 11/8/07

From this blog author on 11/28/07: Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion of Equity! -

Alternatively, we have calculated the provisioning for losses that Ambac will need to make every year on the basis of the anticipated losses that the company will have to pay in coming years. In doing so we have assumed that the 85% of the premium written from 2007 onwards (excluding 15% as underwrting expesnse) will be transferred to the loss expense reserve every year. The loss reserve uptill 2007 is taken from comapny's balance sheet. The losses have been calculated on the basis of various default probabilities assummed in Strucutred Finance, Direct Subprime RMBS and Consumer Finance portfolios. We have assumed a duration of 5 years to spread the losses on various vintages over the coming years. We anticipate the company will have to create a provisoin of $ 6.8 billion under the base case scenario. That;'s about $67 per share, they are halfway there already with $33 per share announced to be expected today. Mayhap someone from this blog should invite the Ambac management team to register...

Published in BoomBustBlog

I'll make this one quick and clean. From the blog post dated Thursday, 29 November 2007 - Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity!:

"The calculations in this analysis are only estimated losses in 4 insured categories (of many, they are enough to generate significant losses). I am expecting higher losses in Public Finance as well due to the loss of property tax revenues (lower tax base) and income tax revenues led by housing value declines and loss of corporate revenue and jobs, respectively. Many municipalities created huge budgets during bubble times (like everyone else) and failed to prepare for the bubble to burst. Now unfunded services run rampant. The shortfall will have to be covered somewhere, and default on debt service is not out of the question.

In the base case scenario created, we expect the company to report losses to the tune of $8 billion+ in its Structured Finance, Subprime RMBS and the Consumer Finance portfolio. This loss will wipe out the company's remaining equity and it will need to raise an additional $2 billion in order to function as an ongoing concern. Moreover, we think the company will need to reinsure a higher percentage of its portfolio in order to transfer risk and free up capital."

The ironic thing is that this particular post encompassed an awful lot of research and calculation, but was derided by many as being too tabloidal and not credible - despite the fact that this post and the three that followed it on Ambac contained more data and analysis (over 80 pages worth) than any Ambac commentary I have seen freely offered on the web to date, save Ackman's Pershing presentation. Two things of note here: 1) the majority are usually overly optimistic at the onset of a bursting bubble, and 2) nothing takes the place of good 'ole fashion, thorough fundamental analysis. As of Jan. 8th 2008, Ambac has previously undisclosed muni problems and has had to go for additional reinsurance. It appears the post is rather prescient in light of the following...

From Bloomberg.com, January 8, 2008:


Wells Fargo & Co. put out a little notice dated Jan. 2 in its role as trustee on a bond issue sold in 2000 by the director of the state of Nevada, Department of Business and Industry.

``The Bonds are scheduled to pay principal and interest in the aggregate amount of $19,013,846.88 on January 1, 2008,'' says the Notice, which continues: ``However, amounts available in the 1st Tier Debt Service Fund and the 2nd Tier Debt Service Fund are insufficient to pay all amounts of principal and interest coming due on that day.''

The trustee goes on to report that, in order to make the Jan. 1 debt service payment, it dipped into the debt service reserve funds, taking $1,620,907.02 from the First Tier fund and $762,896.30 from the Second Tier fund.

Withdrawing money from the reserve funds is never a good sign; depending upon how the issuer defines ``default'' in its documents, it may even signify a so-called event of default. Not to worry, bondholders -- even if the trustee draws down all of the reserve funds -- the First Tier bonds are insured!

By Ambac Financial Group Inc.

Published in BoomBustBlog
Sunday, 13 January 2008 05:00

We all should have known these were coming...

Bernstein Litowitz Berger & Grossmann LLP Announces Filing of Class Action Suit Against MBIA, Inc. and Certain of Its Senior Officers and Directors: The Complaint alleges that during the Class Period, MBIA and the individual defendants, Chief Executive Officer Gary C. Dunton and Chief Financial Officer C. Edward Chaplin, violated the federal securities laws by issuing false and misleading press releases, financial statements, filings with the SEC and statements during investor conference calls. The Complaint alleges that, throughout the Class Period, Defendants misrepresented and/or failed to disclose the true extent of MBIA's exposure to losses stemming from MBIA's insurance of residential mortgage-backed securities ("RMBS"), including in particular its exposure to so-called "CDO-squared" securities that are backed by RMBS. This highly risky exposure was belatedly disclosed in a series of public statements beginning on December 19, 2007 and ending on January 9, 2008, the last day of the Class Period. One analyst observed that MBIA had withheld from the public the riskiest parts of its insured portfolio, while others expressed similar dismay at MBIA's failure to apprise investors of these risks in a timely manner. But the readers of the BoomBustBlog.com knew this way ahead or time, or at least I hope they did.

Keller Rohrback L.L.P. Announces ERISA Investigation of the MBIA Inc. 401(k) Plan: Keller Rohrback's investigation involves concerns that MBIA and other administrators of the Plan may have breached their ERISA-mandated fiduciary
duties of loyalty and prudence to participants and beneficiaries of the Plan. A breach may have occurred if the fiduciaries failed to manage the assets of the Plan prudently and loyally by investing the assets in Company stock when it was no longer a prudent investment for participants' retirement savings. These shysters obviously failed to read Moody's reports. Don't they know that MBIA has AA rated debt and AAA rated claims paying capabilities. Thier new debt even pays 14%, just like junk bonds!

Statman, Harris & Eyrich, LLC Announces Investigation On behalf of Participants and Beneficiaries of the MBIA Inc. 401(k) Plan: The class action Cincinnati law firm of Statman, Harris & Eyrich, LLC announces it is investigating MBIA Inc. (NYSE:MBI) ("MBIA" or "Company") for potential violations of the Employee Retirement Income Security Act of 1974 ("ERISA") relating to the MBIA Inc. 401(k) Plan (the "Plan"). These shysters obviously failed to read Moody's reports as well. I guess us bloggers aren't the only ones left off of the Moody's AA cum junk mailing lists.

In particular, this investigation focuses on whether Plan fiduciaries breached their fiduciary duties by failing to prudently manage the Plan's assets by, inter alia: (a) offering MBIA stock as a Plan investment option and requiring participants to invest in the stock, (b) permitting the Plan to be invested in MBIA stock when it was imprudent to do so, and (c) encouraging investment in the Company stock in the plan by withholding or concealing material business or financial results information from the Plan's participants and beneficiaries.

Fitch Places 1 class of Nelnet Education Loan Funding, Inc. on Rating Watch Negative: Fitch Ratings-New York-07 January 2008: Fitch Ratings places 1 class of Nelnet Education Loan Funding, Inc. student loan interest margin securities on Rating Watch Negative. This action follows Fitch's placement of MBIA and its financial guaranty insurance subsidiaries Insurer Financial Strength (IFS) rating of 'AAA' on Rating Watch Negative. For more information please refer to 'Fitch Places MBIA on Rating Watch Negative on CDO & RMBS Review ', dated Dec. 20, 2007, available on the Fitch Ratings web site at 'www.fitchratings.com'. The ratings of the following ABS transactions are supported by a financial guaranty policy provided by MBIA Insurance Corp., which is a subsidiary of MBIA, and therefore are placed on Rating Watch Negative. Nelnet Education Loan Funding, Inc. (fks NEBHELP) - 1998 Trust (SLIMS) --class SLIMS at 'AAA'

As I have said in the past, Fitch is getting more aggressive than the other two big agencies. I expect to see more of this as teh losses pile on to the point where avoidance of a downgrade becomes a public relations nightmare. As it is now, I am sure the more shaky clients of ABK and MBIA are quaking in their boots - particularly after what happened with ACA.

Published in BoomBustBlog
Now, I am far from a fixed income specialist, but I just couldn't resist commenting on this...
From Reuters:
Investors may snap up a planned $1 billion debt sale by a unit of MBIA Inc, after the beleaguered bond insurer was forced to ramp up the deal's yield to about 14 percent to attract greater interest, according to investors familiar with the deal on Friday. The issue of so-called surplus notes by MBIA Insurance Corp. is part of an effort by the bond insurer to buoy capital and preserve its "AAA" rating. Investors on Thursday said dealers were negotiating a coupon rate between 9 percent and 12 percent, or as much as double what similarly rated bonds offer. "They had problems getting it done at the levels that were initially talked about," said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "When they bumped it out to 14 percent, it got a lot of people out of the wood work." At nearly twice the prevailing rates, what do you expect?

Surplus notes, unique to insurers, can bolster MBIA's balance sheet since they can be classified as equity. Pricing on the issue, initially expected this week, is uncertain, said another investor, who declined to be named. Delayed pricing may be due to negotiations over protections demanded by some large investors against a five-year call feature, he said.

Not mentioned here is the risk of MBIA tripping its net worh covenants, due to the drawdown caused by marking to market. I warned of this at least two months ago, but I am not going to say I told you so. Specifically, Ambac is at risk with their Citibank $400 million credit line, and MBIA with their $500 million credit line.

From Marketwatch:

A general pricing guideline for surplus notes would be 100 basis points higher than the spread of an existing bond from the company with a similar maturity. MBIA's 7.15% issue due 2027 is being traded at 488 basis points over Treasurys, according to data from MarketAxess.

From Dow Jones:

MBIA Inc. (MBI) faces a purported class-action lawsuit for violating federal securities law from Jan. 30, 2007 through Jan. 9, 2008, according to the law firm Bernstein Litowitz Berger & Grossman LLP.

Representatives from MBIA couldn't be immediately reached for comment.

The Armonk, N.Y., financial services company is alleged to have issued false and misleading press releases, financial statements, filings with the Securities and Exchange Commission and statements during investor conference calls regarding its expose to losses stemming from MBIA's insurance of residential mortgage-backed securities. I am not going to say I told you so, am I?.

The suit alleges that in doing so, MBIA violated section 10b of the Securities Exchange Act of 1934 and rule 10b-5.

MBIA's chief executive and financial chief were also named in the suit.

From Bloomberg:

MBIA Inc., the largest bond insurer, is offering to pay a yield of about 14 percent on its $1 billion of AA rated notes, a rate usually charged to the lowest-ranked borrowers.

The yield would be 3.125 percent higher than what Greenwood Village, Colorado-based First Data Corp. paid in October when it sold $2.2 billion of bonds to finance its leveraged buyout by Kohlberg, Kravis Roberts & Co., according to Merrill Lynch & Co. index data. It is also more than a 140% (or 840 basis points) premium over B of A's AA notes, indicating AA can mean a lot of different things to a lot of different people. If surplus notes normally demand a 100 point spread, we are in uncharted territory here. I know Moody's and I have two dstinct interpetations "investment grade". I think the market differs with Moody's on this one as well. But hey, I am not a fixed income guy so I don't know this stuff that well. I'm rather well endowed in the good 'ole common sense department, though.

Short interest in MBIA was 46 million shares as of Dec. 31, more than double that of a year earlier as hedge funds including William Ackman's Pershing Square Capital Management bet the stock will decline further. Short sellers sell borrowed stock in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder. Credit-default swaps on MBIA rose to distressed levels as investors demanded 12 percentage points upfront and 5 percentage points a year to protect MBIA bonds from default for five years, according to broker Phoenix Partners Group in New York. The price means it costs $1.2 million upfront and $500,000 a year to protect MBIA bonds from default for five years. So, Moody's/Fitch and the market are at least 500 basis points in disagreement. Somebody's wrong. Fitch admitted that they factored into their investment grade modeling HPA (housing price appreciation) that would go on in perpetuity- that is that housing prices would never go down. Taking this into consideration, my bet is against the ratings agencies.

CDO Losses - MBIA, which gets 90 percent of its revenue from insuring state, municipal and structured finance bonds, reported profits every year for at least the past 16 years. Net income in 2006 rose 15 percent to $819 million. But they are taking unprecedented losses now. The $737 million expense includes $614 million set aside to cover losses on home-equity loans, MBIA said today. The value of CDOs the company insures has slumped by $3.3 billion before tax, MBIA said. That includes about $200 million that MBIA expects to pay claims on. I'm not going to say I told you so.

The losses forced MBIA to ask Barclay's Bank Plc to change terms of a credit agreement to help it avoid breaching a net- worth condition because of the losses, according to a regulatory filing today. I'm still not going to say I told you so.

The company said the losses aren't ``predictive'' of future claims. He's right. Future claims are probably going to be worse...

Published in BoomBustBlog
Saturday, 05 January 2008 05:00

Download a "Window" into Ambac's Problems

Two simple, but unflappable tenets that I follow when investing are:

1.) Economic profit must be evident in order for the investment to be worthwhile. Economic profit exists when the reward achieved exceeds the risk assumed in getting such reward; and

2.) Simpler is better (KISS - Keep it Simple). A lack of transpasrency in the money trail of an investment diminshes its value.

Tenet number two is often misconstrued on Wall Street. Complex 'high finance' investments are not necessarily better than simpler ones. As a matter of fact, seen in light of tenet number one, increased complexity increases risk, thus reducing value.

Often vendor orientated profit is the reason for excessive complexity. If customers cannot understand the pricing (due to lack of transparency) the vendor can charge more. Vendors can then play on the customer's insecurities in that customers feel more sophisticated, knowledgeable and "cool" if they have the latest product that only the special and intelligent can understand - ala Marketing 101.

After talking with friends that specialize in structured products, risk management, and auditing industries, I came up with the idea for this piece. Why not try to offer a simplified method of looking at the risk of the monolines for the layman? Now, of course many professionals will say that the business is too complex for the layman to grasp the risks and rewards involved. Hey, that may be true, but that also brings us back to tenets one and two. If it so complex that risks cannot be seen, or so complicated that rewards are not easily applicable to the business then how valuable is the business and how risky is it really? Does such complexity really warrant a AAA rating, especially in the face of so much adversity? Complexity sure as hell appears to have stumped the management of the monolines, since they have both insured and invested in structured products for which they aren't sure of the payouts in the event of default(see below). There are simpler ways of looking at risks. When in doubt, one can always default to the market - Ambac's credit default swap spreads are reportedly trading at, or near, junk levels indicating a 20%+- probability of default (so they say on the trading desks).

I performed a decent amount of research on the two biggest monolines, which, besides being a little jovial, brought up some damn good points, not the least of which was the potential for insolvency! Nouriel Roubini queries (and rightfully so since I have queried the same and I am NEVER wrong:-), the delay in rating agency downgrading the monolines - "a business model that cannot survive without a AAA rating is a business model that cannot fundamentally deserve a AAA rating ".

Published in BoomBustBlog
Saturday, 29 December 2007 05:00

A personal email on the monolines, pt. deux

This is a second set of email between me and my friend, the big willy of corporate finance. The first set is here. Here we really get into it as the classical corporate guy versus blue collar working stiff class conflict scenario. Okay, I may be exaggerating a bit, but we do challenge each other's knowledge and grasp on the topic at hand. Just to let you know, this is a really smart and accomplished guy whos is highly positioned. I remember when he was just getting started. I lent him his first set of books on structured products. Oh no! It looks like I helped to create a FrankenFinance Monster :-) All jokes aside, he is a very good friend, and I am using these email exchanges as content because I believe they illustrate a very interesting point in my view of the market vs. many of those who may be opposed to my way of viewing things. Sometimes, when you are too close to something for too long, you can't see the forest because those damn trees keep getting in your way!

He is the penultimate insider, I am about as outside as an outsider can get. We are polar opposites, yet friends for 22 years and counting. Now, on to the story... I had to modify some portions since I cannot represent any form of investment record publicly.

______________________

Wall Street Big Willie

You lost me in the first paragraph with ........"since much of the structured prodcut insurance should technically be booked at a loss at inception of the contract" .....(ridiculous since the earned "spreads" would obviously offset any losses AND actuarial analysis would clearly disagree) .

Published in BoomBustBlog
Friday, 28 December 2007 05:00

The Ambac FAQ

LOGO

Below is an excerpt from the FAQ that Ambac posted on their website, along with my comments. The most of the full FAQ and more of my comments are seen further below.

What percentage of the $550 billion par of guaranteed obligations are represented by direct subprime RMBS and by CDS on ABS CDOs, including the CDO-squared deals?

Ambacâ€TMs portfolio is a highly selective sub-segment of the market. As of September 30, 2007, our direct subprime RMBS business represented 1.6% of Ambacâ€TMs $550 billion in guarantees outstanding and CDS on ABS CDOs represented 4.8% of the portfolio. Okay, so you have $3,520,000,000 here that you recognize here, but if you add that to the $22.4 billion above and then add that to the risky consumer finance (which, luckily for you, has avoided media attention) and the potential increeases in muni exposure due to under funded budgets and the decreasing revenues from practically all product lines as expained above - Houston, we have a problem! With just these two paragraphs, excluding consumer finance and 95% of ALL of your other insured liabilities, we still have $26 billion of some of your riskiest exposure compared to $1.65 billion of book equity, a $2.6 billion market cap, and $14 billion of claim paying ability! And we are only talking about 5% of the total risks insured here. Less than 10% in claims in your RISKIEST business (quite plausible) exceeds your market cap in terms of losses. Less than 6% in losses (the lower end of the current trend in the products mentioned) wipes out your book equity. Houston, we do indeed have a problem. Equity investors, take heed! I'm tired. It's 5 a.n. in the morning, and I think we have reliably come to the conclusion that we do, indeed, have a problem.

Published in BoomBustBlog

Dec. 28 (Bloomberg) -- Billionaire investor Warren Buffett is
starting a bond insurer to take U.S. local-government business away
from companies including MBIA Inc. and Ambac Financial Group Inc., the
Wall Street Journal reported.

Berkshire Hathaway Assurance
Corp. opens for business today in New York State, Buffett, chairman of
Omaha, Nebraska-based Berkshire Hathaway Inc., said in an interview
with the newspaper...

Buffett, who said in October he
was looking for investments to absorb $45 billion of cash, is
challenging the bond insurers as they struggle to retain the AAA credit
ratings that allow them to guarantee debt. The top rankings of MBIA,
Ambac and other so-called monolines are under scrutiny amid concern
they don't have enough capital for the $2.4 trillion of debt they
guarantee.

 

``The monolines are hurting so now is a good time for Buffett to be getting into the market,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. ``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them.''

Buffett, 77, told the Journal he will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida.

Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums.

Buffett, who said he would charge more than existing financial guarantors, would present competition for Armonk, New York-based MBIA, as well as Ambac and FGIC Corp. of New York, as they try to convince Moody's, Fitch and S&P that they deserve to keep their top ratings. Suuuurrrree they do! Look here icon Ambac Valuationmodel 03december2007 Ver1.0%281%29 (878.65 kB 2007-12-24 15:41:20)

Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees. These companies with a mere $2 or $3 billion of capital are struggling to overpay for $1 billion in financing just to keep a rating they don't deserve. How in the world can compete against a $45 billion capitalized, conservative insurer with a sterling track record and reputation? These companies are done, don't even bother to stick a fork in. I told you they were done before, they are extra crispy now for the only new business for them to write is business that they shouldn't write. That Warburg Pincus investment in MBIA is money flushed down the toilet.

`Mass Destruction'

Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac.

The companies stumbled as they expanded beyond municipal securities into structured finance securities such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces.

Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs.

New York-based monoline ACA Capital Holdings Inc. is struggling to stave off delinquency proceedings after the value of the CDOs it guaranteed plunged. S&P cut ACA's rating by 12 levels to CCC after the company posted a $1.04 billion third- quarter loss.

ACA Financial Guaranty Corp., a unit of ACA Capital, said this week it will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends.

Smelling Opportunity

Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance cover for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses.

``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.'' Yeah, I agree. It's the monoline derivative insurer that is DOA.

Separately, Berkshire Hathaway agreed to buy the reinsurance unit of ING Groep NV for about 300 million euros ($440 million), the biggest Dutch financial-services company said in a statement today.

Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged 25 percent this year. The stock had only three losing years since 1988.

Published in BoomBustBlog

I just warned about this early this morning.

CIBC Provides Update to Previous Disclosure on U.S. Subprime Real Estate CDO / RMBS including Likely Large Write-down in First Quarter 2008 Financial Results
Canada NewsWire via COMTEX - Wednesday, December 19, 2007; Posted: 11:40 AM

"Following Standard and Poor's announcement today that it had reduced the credit rating of ACA Financial Guaranty Corp. from "A" to "CCC", CIBC confirmed that ACA is a hedge counterparty to CIBC in respect of approximately U.S. $3.5 billion of its U.S. subprime real estate exposure."

ACA is a small player. Those guys insured by Ambac are in for a RUDE awakening. This includes several of the I banks in this article that I am commenting on. Just go through the pdf file in the Ambac analysis follow up to see who's gettin' who.

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