The Big Picture

« CNBC's Morning Call appearance | Main | MOODY'S PLACES ITSELF ON NEGATIVE WATCH »

Read it here first: CDO Lust Undercut AAA Success

Thursday, January 24, 2008 | 04:00 AM

in Derivatives | Financial Press | Fixed Income/Interest Rates

Last week, we discussed the foolish shift among the monolines from staid Bond insurers to derivative dab blers in Counter-Party Risk.

Now Bloomberg has picked up the same meme:

"Municipal bond insurers such as MBIA Inc. and Ambac Financial Group Inc. had a good thing going.

For years, they earned some of the highest profit margins in any industry -- by writing coverage for securities sold by states and cities to build roads, schools and firehouses. During the past five years, MBIA's average profit margin was 39 percent, more than four times the average of the Standard & Poor's 500 Index, according to data compiled by Bloomberg. Ambac's average profit margin was 48 percent.

The good times are over, and the culprit isn't municipal bonds; it's subprime debt, a market the insurers waded into in pursuit of even greater profits. Some of the biggest bond insurers are facing potential claims that may deplete their capital. Their share prices have plunged, and credit rating companies are scrutinizing their AAA status. Ambac became the first insurer to lose its triple-A rating, when Fitch Ratings downgraded the company to AA on Jan. 18.

The WSJ had a long column on monolines last week (but not on the AAA to CDO/CDS shift). Usually, the MSM is 6 months to a year behind us. This was only 4 days.

That's not too bad. . .

Source:
Ambac, MBIA Lust for CDO Returns Undercut AAA Success
Christine Richard
Bloomberg, Jan. 22 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=aw1Oh4B0Wvv8&