In the midst of all that rogue trader excitement, we rather forgot about the poor old monolines, teetering on the brink of non-existence and generating noises about the kind of concerted bail-out effort not seen since LTCM.
Time for a catch-up. And what a lot has happened.
No sooner had questions of the necessity of a bailout been raised, such as by Deal Journal, et voila. It transpired, via an FT scoop, that the US banks were coming under pressure from New York’s state insurance regulator to provide as much as $15bn to support the bond insurers.
From where does this $15bn lifeline figure emanate, pray?
Yves Smith thinks he knows. Over at Naked Capitalism he points out that noted monoline-shorter Bill Ackman, of Pershing Square, has been circulating his analysis that additional equity to the tune of $15bn would be required to maintain the AAA rating of MBIA and Ambac, the two biggest firms.
He also this month wrote a letter to the rating agencies explaining how, where and why, in his opinion they’ve been getting it wrong with the monolines.
The magic $15bn figures isn’t beyond dispute. Smith notes that new rating agency Egan Jones says the industry needs $200bn in additional capital to survive.
But what is notable is that Ackman passed his findings along to New York insurance superintendent Eric Dinallo at some point last year, before he presented the analysis at a November conference. Dinallo, we now know, contacted Warren Buffett that month about getting into the municipal bond business, and Smith can’t help but wonder about the timing.
The numbers too are similar - with Dinallo aiming to raise $5bn immediately, and $15bn over the longer term to support the monolines. The concern is that the regulator are, in the absence of any idea of their own, being guided heavily by the numbers produced by Pershing Square.
After the euphoria surrounding the plans for a rescue mid-week, it was time to take a breather - with Dinallo himself emphasising that these “complicated issues” would take some time to resolve. Time the bond insurers don’t have. As if on cue, SCA was waving goodbye to its AAA rating, as it ditched plans to raise $2bn in fresh equity and got cut to single A by Fitch.
Dinallo may be the man to do it - a longtime associate of NY Govenor Eliot Spitzer, who gave him his current job, he was instrumental in driving the cases against conflicts of interest and dodgy IPOs during the dotcom boom. But the dawning realities of the complexities of a orchestrated bail-out, sent the monolines shares south again on Thursday.
Come Friday and it seems that everyone wants to be a bond insurer. The FT reports that private equity groups, include TPG, and value investors like Wilbur Ross are considering launching bond insurers in a move that could hamper efforts to help out the struggling incumbents.
This perhaps made more sense than an earlier story in the Standard, which put Ross in takeover talks with Ambac.
As Buffett doesn’t appear to be stumping up to rescue anyone (except a small bit of relief for Swiss Re), we need another big name. But if Ross is considering that, he should also consider a sanity check, says Smith.
Ooh, either Wilbur Ross, a savvy investor in distressed assets, has completely lost his judgment with his advancing years, or he has been leaned on by the powers that be to look at this deal in the hopes that it might bring others to the table.
From the Standard:
Ross declined to comment on specific potential deals but said he was keen to buy a bond insurer to take advantage of a coming wave of consolidation…..
….”The monoline insurance industry’s success depends on the reversal of some very unfortunate errors,” Ross said. “It took what was a very safe industry and, through quite terrible misapplication of risk management, caused the troubles we see today.”
He added that any deal would depend on whether “you really have your arms around the degree of insolvency” in the sector.
Calculated Risk thinks that when it comes to the monolines a deal on the basis of having “your arms around the degree of involvency,” means no deal at all.
More reading:
Gillian Tett: Is a monoline bail-out sensible?
The Economist: Buddy, could you spare us $15bn?
