Sunday, August 3, 2008

Another monoline play?

Let's go back to June 18. That evening, Bill Ackman gave a speech saying (FSA)Financial Security Assurance may be insolvent because it sold swaps backed by mortgages that have tumbled in value. He said, `"The market has not woken up to FSA. FSA is AAA stable, just don't look too close.''

So Ackman was claiming, FSA, of which he was playing by credit default swaps, was insolvent. That statement is against the law. Look what Eric Dinallo, the Superintendent of the New York State Insurance Department had to say in this article in the Financial Times:

All financial services companies – banks, investment banks and insurance companies – rely on market confidence. Just as a depository institution’s continued existence depends on the confidence of depositors, so an insurance company’s existence depends on the confidence of policyholders.

This is why New York State enacted a law in the 1930’s providing for civil and criminal sanctions for spreading false rumours or making statements “untrue in fact” about an insurance company’s solvency.

This law recognises that insurance companies can be destroyed by false claims that they are insolvent – that is, unable to pay their claims.

Recently, some individuals have asserted that some of the bond insurers are insolvent – a far more serious, far reaching and risky allegation than claims that the insurer’s holding company stock is overvalued.

Enter Exhibit A: Mr. Bill Ackman, who just broke the law. Mr. Ackman boasted that he went through 150,000 documents before he decided to short the monolines. Heh, I read 2,000 words a minute on a bad day, but all that reading doesn't guarantee that you can pick stocks, but it will help the conversation around the dinner table. And Ackman proves that. Despite all his speeches and reading, he is still down 2% YTD in his $6 billion Pershing Square Fund.

But let's get back to his speech.

On June 18 on the night of his speech, (FSA, which is a wholly owned subsidiary of Dexia) FSA debentures(ticker symbol FSE) were at 19.72. Friday they closed at 9. You can't play credit default swaps on FSA, so this is the way to play the recovery in market psychology in FSA without having to read 150,000 documents. You just need to read one.

This post.

Here's some more of the same article, written by Eric Dinallo, the Superintendent of the New York State Insurance Department. (Yes I am repeating myself for emphasis!)

To protect policyholders, we facilitated the injection of more than $7bn into existing bond insurers, licensed new entrants in record time, continue to facilitate additional capital infusions and are preparing for the rational wind-down, that is, run-off, of any impaired companies. We have been successful despite attacks on the stock prices of the insurance holding companies, which have made those tasks more complicated and challenging. Rumour mongering and inaccurately disparaging insurance company solvency, however, crosses a line.

Indeed, solvency determination is one of the Insurance Department’s most important roles. For insurance, solvency is a regulatory concept that is complicated because premiums and claims are often paid over a long period of time. Insurance has its own system of Statutory Accounting Principles that differs from Generally Accepted Accounting Principles in meaningful and logical ways. Solvency essentially means that an insurance company can pay its claims when they become due. That is a determination generally made only by the regulator based on examinations or confidential insurance company filings.

Moody's, which warned FSA on ratings; looked like it bungled at best, and bribed at worst, it's ratings in the past, is now overreaching the other way. I'd discount Moody's and say that is already reflected in the marketplace.

But if the other monolines, with their commutation of contracts, are now perceived as a safer bet, and you would like to bet against Ackman's call, then these FSA debentures are a "derivative" play on his credit default swap bets blowing up!

Wall Street? It's just a craps table. But at least you have the Superintendent of Insurance leaning on the table when you're throwing the dice.

And we know that the croupier always wears a tux.

Ackman only wears one when he's on the charity circuit!

And he wasn't wearing one when he gave his speech!

No comments: