Friday, December 28, 2007

More on Moody's and MBIA

Interesting news lately on MBIA -- stock pops recently because the Davis funds bought more than 5% of the stock and then yesterday Buffett comes out and says he is going to start offering muni bond insurance.

That's the problem with the insurers -- now that everyone is questioning their ability to pay off on the bonds they already have insured, how many are lining up to get that same guarantee on new issues? Seems like some states and cities have called Buffett and asked them to insure their bonds. Berkshire Hathaway has a solid AAA with more capital than anyone else in the insurance market so they are taking advantage of the current panic to make a dime, while its available. If MBIA and Ambac return to solid footing and start pricing insurance like they recently did -- too cheap -- then Buffett will take his money and go home.

Could see others like AIG or GE Financial Services join in as well, while the big 2 are struggling.

That increased competition could take some of the better margin business away from the big 2 (mbi and ambac), which will hurt their ability to earn their way out of this problem.

So the big question is will the same thing happen to Moody's? A tough question for me to answer but I think there are subtle differences between them that make all the difference in the world.

The bond insurers are financially weak -- there are serious questions about their ability to pay claims -- this is tangible dollars and cents at stake. Moody's renders opinions that are often wrong -- have been in the past and likely will be in the future. The value of the opinions is for both regulators and institutional investors to have guidelines -- a frame of reference -- on the credit worthiness of fixed income securities. But Moody's reputation is not the same as dollars and cents. Is it possible that new raters will try to take advantage of the tarnished reputations of Moody's and S&P -- its possible but not as necessary as with the insurers.

Some unsophisticated investors who were greedy -- meaning they didn't understand risk and reward -- chose to bless the AAA rating on CDO's to be as true as the Gospels -- hasn't worked out that way. Moody's is learning and will adapt in terms of how they rate future structured product. dumb investors have lost their money -- not likely to trust the AAA rating as much but what about all the other fixed income investors? I suspect they will trust the AAA as much as they have in the past.

Oh and those Davis boys? They owned over 7% of Moody's as of the end of September so their exposure to Moody's is actually significantly greater than it is to MBI (5% of 2.5 bill vs. 7% of 10 bill).

about ready to buy my next round -- too bad I can't (out of the office so I can't access the ethics system to get employer approval).


Anonymous said...

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Anonymous said...

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