Thursday, August 28, 2008

Another new deal for the monolines?

A few weeks ago, when AmBac commuted their CDO's with Citigroup, CreditSight analyst Rob Haines (who seems to be in the pocket of the short hedge funds) had this to say about the commutation:

"We think (commuting) will backfire and erode capital at an acclerated rate since both the cash used to commute contracts and the installment premiums associated with those canceled policies will head out the door. Ultimately, we believe that structured contract holder will crowd out their municipal book as they race to get as much capital as they can before a potential rehab event."

AmBac closed at $3.79 that day. Since then it has doubled. How useful was CreditSight analysis? It had zero value to the marketplace.

It looks like the marketplace is finally recognizing what even Moody's has acknowledged. Credit default swaps are treated like derivatives, so they are marked-to-market on insurers' balance sheet even though they may not have any impact on claim paying ability.

And that's why we had such hysterical crying by the short hedge fund crowd, screaming doom and gloom and the falling of the sky on the monolines.

The hedge fund boys wanted to push the insurance companies into "insolvency."

Then they could force the insurance companies to pay current market value prices because of insolvency termination clauses.

But their gambit didn't work.

Now we are hearing about more commutations led by other insurance commissioners brokering deals. And the value of the monoline insurance is already helping rates in the marketplace.

Look at the bonds of Oxnard Finance Authority and the San Pablo Redevelopment Agency. Ambac is used as a backstop, and the rate has gone down considerably on their variable rate bonds. It had spiked up to 7%, and now is at 1.48%.

Those that thought that Ambac's Connie Lee municipal insurance was a long shot, should remember that three weeks ago, ABK said that Connie Lee could be up and running by October 1st.

With what happened to MBI today, market bears that were dismissive of Connie Lee, will now have to seriously consider it.

And with more deals in the whisper pipeline, the story on the monolines is getting much better!

And for the shorts, it's getting much worse!

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