Silverbird
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Death of a Bond Insurer
Wall Street used ACA to hide loads of subprime risk. It worked—until the tiny company collapsed
Here's another secret behind the mortgage mess: It turns out that Wall Street generally didn't buy insurance on subprime bonds to protect against default. Instead, many big banks used the policies to play one set of accounting rules against another....
In retrospect, the bond policies only masked the inevitable subprime stink, until it became too overwhelming by late 2007. In November, ACA's parent company reported $1billion in losses for the third quarter. Standard & Poor's (MHC) put the insurer under review, slashing its credit rating from A to CCC a month later. The downgrade forced the insurer to come up with more collateral to show it could pay potential claims, under the terms of its agreements with banks. ACA didn't have the funds to make good on those deals, prompting Merrill Lynch (MER), UBS, CIBC (CM), Australia & New Zealand Banking Group, and other clients to take big losses on the policies. Australia & New Zealand Bank said its bonds remain solid, even without insurance. UBS and CIBC declined to comment.
http://www.businessweek.com/magazine/content/08_15/b4079024463824.htm
Wall Street used ACA to hide loads of subprime risk. It worked—until the tiny company collapsed
Here's another secret behind the mortgage mess: It turns out that Wall Street generally didn't buy insurance on subprime bonds to protect against default. Instead, many big banks used the policies to play one set of accounting rules against another....
In retrospect, the bond policies only masked the inevitable subprime stink, until it became too overwhelming by late 2007. In November, ACA's parent company reported $1billion in losses for the third quarter. Standard & Poor's (MHC) put the insurer under review, slashing its credit rating from A to CCC a month later. The downgrade forced the insurer to come up with more collateral to show it could pay potential claims, under the terms of its agreements with banks. ACA didn't have the funds to make good on those deals, prompting Merrill Lynch (MER), UBS, CIBC (CM), Australia & New Zealand Banking Group, and other clients to take big losses on the policies. Australia & New Zealand Bank said its bonds remain solid, even without insurance. UBS and CIBC declined to comment.
http://www.businessweek.com/magazine/content/08_15/b4079024463824.htm
