Monday, April 21, 2008

Come Watch the Death of a Bond Insurer

This week the market gets front row seats in the death of a bond insurer. In February, the forebearance for ACA Capital Holdings was extended to April 23rd. This date approaches in a couple of days and is unlikely to be extended. The outcome at this point is obvious according to most pundits, the complete implosion of the bond insurer.

The open question remains of what impact this event will have on the municipal bonds which are insured by ACA. In most cases, the expectation of the bond insurer failure is already priced into the munis. However this can not be a good sign for the jittery auction rate or municipal markets.

At minimum, mid-week will be the time to pull up a chair, grab a drink, and see how the entire situation with ACA unfolds. Will some firm magically step up and save the bond insurer? Will regulators from New York State step in? The flak from the implosion splatter across the Wall Street landscape? Will it give CNBC something to talk about instead of the mediocre first quarter earnings?

One recent BusinessWeek article outlines how Wall Street used ACA to hid loads of subprime risk with the eventual unintended consequence of sinking the entire business, including the bond insurance operations.

An associated story outlines the failure of S&P, the only credit-rating agency to follow ACA, to properly cut the companies rating in a timely manner. On December 19th, the rating agency cut ACA’s grade from A down to CCC overnight; immediately turning gems into junk.


GregB said...

Shocking many investors, the forebearance has been extended to May 30th.

ACA Capital Forbearance Extended until May 30, 2008