More good news for monoline shorter Bill Ackman, with MBIA down 8.3 per cent and Ambac down 5 per cent on Friday.
Why? Because of this, from the FASB (HT, Naked Capitalism):
The recognition approach for a claim liability relating to a financial guarantee insurance contract requires that an insurance enterprise recognize a claim liability when the insurance enterprise expects, based on the present value of expected net cash outflows to be paid under the insurance contract discounted using a risk-free rate, that a claim loss will exceed the unearned premium revenue.
Or in other words, monolines are going to have to start factoring in expected losses on their insurance contracts. Rather incredibly, a practice they’ve hitherto been spared. Under the new rules, monolines will need to increase their reserves commensurate to the repayment risk on the insured securities. Alas, it’s not all plain sailing:
Under this Statement, the expected net cash outflows are developed using the insurance enterprise’s own assumptions about the likelihood of all possible outcomes based on all information available to the insurance enterprise (including relevant market information).
So there’s still plenty of latitude for gaming the new rules, AIG-style.
Related links
FASB issues rules to toughen bond insurer disclosures - Bloomberg
