Tuesday, July 22, 2008

A Recovering Monoholic Writes

At this rate they're going to be written on my headstone. The words of that banker from years back. "The monolines are basically the creatures of the ratings agencies."

Bill Ackman was right, you see, though for the wrong reasons, and is going to get what he wanted not through his adoring phalanx of reporters but through the efforts of the ratings agencies. You can get a reasonable summary of Ackman's case from the post I linked to above, and some of the links there, but Ackman said that Financial Security Assurance, which did not make anywhere near as many bad calls as its rivals when insuring business, was still going to be in trouble because of the crap it bought for investment purposes.

At the end of the summary, or rant, if you prefer, I then included this awesomely prescient line:

There's always the possibility that Moody's lead monoline analyst, Jack Dorer, or his counterpart at S&P will wake up one morning and decide to unleash financial meltdown before breakfast.

Because Moody's just decided to put FSA on review for downgrade, together with Assured Guaranty, which doesn't have an investment portfolio full of crap. Bet Ackman's wishing he bought credit default swaps on Assured, too, eh, Bill? Bloomberg's Christine Richard, who leans heavily on Ackman as a source, and of whom I've been unfairly critical in the past, focuses on just the right bits here. I'll use her excerpts:

The rating company also cited "a reduction in overall market demand'' for bond insurance in separate reports today..."Today's rating action reflects elevated risks with the financial guaranty insurance market,'' Moody's said in both statements.

The ratings agencies are cutting the monolines loose, make no mistake. They have decided that the current rate at which the monolines produce business will not provide them with large enough claims-paying resources. Because of how crappy Ambac's and MBIA's books were they were able to tell their shareholders to cough up additional equity or else. Here, they're being a little more subtle, though no less lethal.

This is a classic ratings agency death spiral. Agencies raise questions about rated entity's business, which leads to a collapse in confidence, which stops off the flow of cash, which leads to another downgrade. And this one isn't really their fault. The monolines, and the wider market, trusted the agencies to price the risk of their insurance commitments more cheaply than potential uninsured investors in the bonds would.

The agencies, channeling Keynes have now decided to take a different tack. They'll never admit to having so much power over the process, but the whole situation has been a bit of an embarrassment to them. Basing a business on this difference in opinion (or arbitrage, if you must) will always be reliant on a ratings agency methodology much more stable than the ones on offer right now

Looks like they're could make it so expensive to capitalise a monoline that Wilbur Ross (Assured) and Dexia (FSA) will abandon the mess for good. The only one left standing, as Bloomberg's Richard hints, will be the monoline subsidiary of noted Moody's shareholder, and all-round capitalist icon, Berkshire Hathaway.

Actually, it's probably wrong of me to try and imply that the saintly Warren Buffett would be involved in SKULLDUGGERY, since deep down I know that he would avoid a downgrade even if he were not a shareholder. If there's one thing that would seal the tattered fate of the ratings agencies it would be downgrading the Sage of Omaha. There would be mobs running up Church and Water Streets baying for the (pointy) heads.

I'm going to end this stretch of wild-eyed prognostication with a caveat. Fixing FSA and Assured is possible, given enough love, money, and agencies that don't indulge in Cranky Time as much as my young boy (yay child reference!). But I'm well into the acceptance phase now, and ready to contemplate a world without bond insurance. Smells good out there.


Post a Comment

<< Home