How Regulators Failed the Monolines

I have a feeling it's going to be Monoline Day today. MBIA's conference call at 11am should be interesting, even though the company has said it's not going to take any live questions from analysts. Until then, the quote of the day goes, unsurprisingly, to Bill Ackman, from his letter to regulators:

From 2005-2007, the total universe of ABS CDOs outstanding is comprised of approximately 534 deals. While MBIA and Ambac appear to have only limited direct exposure to this pool (having directly guaranteed only 25 and 28 CDOs, respectively), in fact, MBIA and Ambac are actually exposed to at least 420 and 389, respectively, of the 534 total CDOs outstanding if you include the CDO exposures within the CDOs they have guaranteed. The fact that MBIA and Ambac have direct or indirect exposure to 79% and 73%, respectively, of all ABS CDOs issued from 2005-2007 directly contradicts the insurers' public statements about their "highly selective" approach to CDO guarantees.

MBIA and Ambac, just like the ratings agencies, have proved themselves to be much better at judging real-world projects and credits than they are at judging the creditworthiness of sophisticated financial products. There's a regulatory failing here: the regulators should not have allowed these companies to guarantee products they didn't understand. Which is possibly one reason why the regulators still haven't cracked down on the monolines.

For a good background on exactly how and when the regulators signed off on this new business, read yesterday's WSJ story on the subject. It all started around 1998-9, it would seem, with the creation of entities known as "Transformers". Really.

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