Might Want to Keep an Eye on the Monolines

Some interesting and potentially positive developments for the beleaguered bond insurers this week.  If nothing else, it is a rare occurrence for these whipping boys of the securitization industry (beat up only slightly less than the reigning champs, the rating agencies) to get an opportunity for some really positive (and “free”) publicity.

In a rare set of circumstances, MBIA and Assured Guaranty got the golden opportunity to tell their story about how they got into such a mess in mortgage-backed bonds 5 and 6 years ago without a retort from the banks and underwriters who they believe, at best, misled the insurers and, at worst, committed fraud.

Both the monolines and the leading characters among the banks and investment banking community that were in the middle of the frenzied mortgage-backed bond industry in the last decade, were invited to testify before the New York State Assembly’s Standing Committee on Insurance.

While MBIA and Assured Guaranty sent their chief executive and general counsel, respectively, to take advantage of this stage to get their side of the story out, the banks took a pass.  This left the floor to the two insurers who made a pretty good case for how they were misled into backing so many bad MBS financings in 2005, 2006 and 2007. 

One section of MBIA’s testimony which was particularly compelling was their detailing of the paid claims that they have accumulated since the market crash and, wouldn’t you know it, all of their loses to date (that’s right, ALL THEIR LOSSES) are in connection with “prime mortgage” securitizations, not “sub-prime” paper as most anyone would probably have assumed. 

Both insurers did well to bolster their argument that the “reps and warranties” that they relied upon in their contracts were simply not worth the paper they were written on.

Probably a shame that the banks did not take the time to defend their side of the story.  Perhaps something to continue to watch.  Certainly both insurers’ stock and CDS pricing reacted favorably to the testimony.

About markferraris
Managing Principal Orchard Street Partners LLC

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