Saturday, 26 January 2008

$15bn or $200bn to save Bond Insurers?

This article on the Monoline Bond Insurers has caught a lot of attention. From the TIMESONLINE:

Mortgage bond insurers 'need $200bn boost'

America's biggest mortgage bond insurers collectively need a $200 billion (£101 billion) capital injection if they are to maintain their key AAA credit ratings, a figure that dwarfs a plan by New York regulators to put together a capital infusion of up to $15 billion, a leading ratings expert said yesterday.

The failure to maintain their AAA ratings will lead to a further round of multibillion-dollar writedowns among the Wall Street banks and other large owners of the bonds, Sean Egan, of Egan Jones Ratings Company, said.

It would also push some of them into receivership, Mr Egan added.

Egan Jones makes its money by selling its research to money managers, rather than through fees from the companies it rates.

It has the same “nationally recognised statistical rating organisation (NRSRO)” accreditation from the US Securities and Exchange Commission as Fitch, Moody's and S&P, the mainstream credit agencies.

A couple of questions come to mind. How can Egan Jones estimate of $200 billion be so far from the figure of $15 billion being thrown around by New York regulators? Secondly, even if it turns out to be half of what Egan Jones believes, who would be stupid enough to stump up that amount of money?

The answer to the first question can proabably be answered by the fact that Egan Jones know what they are talking about and the New York regulators haven't got a clue. Charlie Gasparino of CNBC reported that Wall Street was unimpressed with the the regulators knowledge of the subject and basically told them to go away and come back with an adviser who had some idea of the magnitude of the problem.

Also, notably absent from this debate is any estimate from Fitch, Moody's and S&P on their estimates for what it would take to bail out the bond insurance industry. It wouldn't matter if they did have an estimate since their ratings have about as much credibility as a bumper sticker.

So who are you going to believe? The gang of three, Fitch, S&P and Moody's who get paid by the very companies they rate, conflict of interest anyone? Or an agency that gets paid by how good their research is?

The answer to the second question according the the Wall Street rumor mill seems to be Wilbur Ross, but this guy is a very shrewd investor and I'm sure he will be availing himself of the information provided by Egan Jones before he does anything silly.

How about US banks? There is no way that a bunch of US banks, with capital problems of their own are going to be able to come up with even a quarter of what Egan Jones believes is necessary.

That just leaves the US government as the final backstop. They are stupid enough to get involved, but considering the panicked 'non' fiscal stimulus package they are trying to ram through congress, do they really want to fork out another $200 billion of taxpayers money to rescue a bunch of stupid business decisions?

I say let them go bust. The market solution to the SIV problem was much better than the government sponsored alternative. This will be no different, even if it means another round of writedowns for banks and AMBAC and MBIA go bust.