ACA's ripples

ACA Capital Holdings (1.10) will be the debacle du jour today. Here's the problem. They provide credit protection in derivatives and structured finance. But they have losses on their insured credit swaps of $1.7 billion dollars. It's "unrealized" though. If they get downgraded below A- by S&P, they have to post collateral (pay off the swaps). Their insurance? ACA Financial Guaranty Insurance policy, and they don't have the money. They're well over a billion short.

So here's what ACA had to say in their latest 10Q:

Absent a downgrade or other requirements to post collateral, ACA Financial Guaranty and the Company are currently adequately capitalized to operate their businesses and meet their financial obligations. While the Company recorded a substantial unrealized mark to market loss in the third quarter resulting in a net loss, no defaults that resulted in cash payments under the agreements have occurred and, in the Company’s estimation, are not certain to occur or imminent.

Are these swaps marked to market by all parties? And it's not much of a stretch to see this contagion affecting the AAA insurers next.

The market's operating on internet time, while the Fed is taking the pony express. So with all due respect to Al Gore, I give the august Fed lyrics from Melissa Etheridge's song, I Need to Wake Up. If they can't see the problems, they'll hear about them.

Have I been sleeping?
I’ve been so still
Afraid of crumbling
Have I been careless?
Dismissing all the distant rumblings
Take me where I am supposed to be
To comprehend the things that I can’t see

Cause I need to move
I need to wake up
I need to change
I need to shake up
I need to speak out
Something’s got to break up
I’ve been asleep
And I need to wake up
Now