Thursday, February 10, 2011


To what does this title refer? Perhaps it is the devastation that has occurred in the financial guaranty market. Or it could be the conduct of bankers in the world's largest banks. It could be the developments in the guarantors’ struggles for restitution. It could be extreme credit developments that happen far too often.

Art and crappy blogs necessitate interpretation, so we'll have to let you decide. But at this point in the resurrection of bond insurance, it is worthwhile to take a look at where we stand as it relates to less certain recoveries.

Jaw-dropping developments are following jaw-dropping developments. Though only of anecdotal value, having non-business-centric news stories aghast at the transgressions of your alleged wrong-doer is encouraging. Such is the case today with Louise Story of the New York Times reporting on Bear Stearns' ill-mannered handling of ineligible mortgages.

For almost a year or more, it has been publicly revealed that these underwriters generally used reviews by Clayton Holdings to negotiate and not pass on pricing on mortgages. The individual crystallizations of these trespasses make for powerful legal ammunition, not to mention reading.

Perhaps equally powerful to involved parties were last week’s same-day announcements of two rulings on MBIA v. Merrill Lynch. One ruling dismissed the remaining Breach of Contract claim while another, lower court ruling granted MBIA access to rating agency files on the disputed deals. There are three explanations for the appearance of coordination in these rulings. 1) Coincidence. 2) At least one of the two presiding judges/panel of judges considered this case to be an important component of potential settlement talks. For that reason, coordinated announcements were sought to minimize swings in the balance of power at the negotiating table. 3) Eileen Bransten, the lower court judge, saw the dismissal ruling and – in what one might describe as an “oh shit” moment – expedited her ruling to facilitate the since announced amended complaint by MBIA. The Honorable might be inspired in such an action by a deeper familiarity with the case.

Assign weights of probability to these scenarios as you may. However you do so, the likelihood of what most consider a long-tail event continues to grow. Considering that much of what we know today was known by these parties at some earlier time, the information value provided by MBIA’s 4th quarter financial release could be the largest it has ever been, going into or coming out of the recent calamity, or any other time. Ever.

For those sitting in an Ambac office, we think you will be underwriting deals again someday, albeit after a total rebranding or acquisition of the company. Of course it will be years either way, but on March 2nd we will have a much better idea if that time will come in 2013 or 2020. For those at Nat’l PFG, don’t write off 2011 just yet, though we consider 2012 most likely.

Change begets itself. George Soros pounds this home the idea of reflexivity. Developments in the courtroom may already be spilling over into the supply of capital for financial guarantor recapitalization, as very mildly suggested by Radian’s recent comments. With that in mind, our post's title may refer to the future for this industry.

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