2008 Financial Crisis - Monolines

  • Spencer BACHUS (R-AL) - I believe to protect those that are relying on the bond insurers’ capitalization, I believe the superintendent of the
    New York Insurance Department could have raised the capital standards.
  • Governor SPITZER. Sir, I think you misapprehend—
  • Spencer BACHUS (R-AL) I believe there was inadequate capitalization

2008 0214 - GOV (House) - The State of the Bond Insurance Industry, Paul Kanjorski (D-PA)  ---  [BonkNote]

  • (p17) - Secretary Tim GEITHNER: -- if the monoline insurance companies and AIG were not allowed to -- were not able to write huge amounts of protection with no capital to back it up -- when I said about capital, I meant among the regulated in the areas -- if they had not been able to overwrite those commitments, it would have been a less serious crisis -- a much less serious crisis.
    • And that’s just a more simple thing. It’s not about derivatives so much as being no capital to back a commitment. It doesn’t need a fancy -- it’s not a fancy product or even so much oversight of derivatives.
    • It’s just the regulatory authority responsible for those institutions did not force them to hold capital against their commitments.

2009 1117 - FCIC - Hearing - Financial Crisis Inquiry Commission - Timothy Geithner, Secretary of the Treasury - Closed Session  ---  [BonkNote]

  • The segment of the CDS market that experienced large losses and the greatest difficulties involved CDS related to asset backed securities linked to the subprime real estate market.
    • Although the asset backed CDS market is a relatively small segment of the overall CDS market, large leveraged exposures in this segment magnified losses in the subprime real estate market.
    • The root causes of the problems experienced with this segment of the CDS market arose from a number of sources, including primarily:
      • ⇒ ... the failure of sellers of credit protection, most notably monoline insurance companies, to collateralize their commitments as is customary in the corporate CDS market;
      • ... an historic collapse in housing prices accompanied by soaring rates of mortgage delinquency and default;
      • ... and a market-wide failure to appreciate the scope of the risk represented by exposure to the subprime real estate sector.  (p251)

--  Submitted Statement of Citigroup

2008 1014 - GOV (Senate) - The Role of Financial Derivatives in the Current Financial Crisis, aka Hearing to Review the Role of Credit Derivatives in the U.S. Economy -  [PDF-135p,  VIDEO-CSPAN]

  • Mark Adelson
    • 2010 1022 - FCIC - Interview - Mark Adelson, Standard & Poor's - MP3
    • 2008 0108 - Report -The Sub-prime Problem: Causes and Lessons, by Mark Adelson and David Jacob - 8p
      • Until 1997, the vast majority of home equity ABS had used bond insurance for credit enhancement.
        • Thus, the bond insurers were the main group of market participants pricing the credit risk on deals backed by sub-prime mortgages.
      • A bond insurer would set its premium (fee) for a given deal based on its analysis of the underlying loans and on the seller/servicer's track record.
      • Moreover, a bond insurer would not accept unreasonably risky loans for inclusion in deals that insured.
        • ⇒  The bond insurers' willingness to say "no" was a key constraint on the riskiness of loans that originators could make.
  • (p2) - The scale of losses relative to capital and potentially problematic exposures relative to capital, so far, are much greater for institutions where we the Fed is not the primary consolidated supervisor, including some major non-U. S. banks, investment banks, the GSEs, and the monolines. 
  • (p4) - The extent of basis risk in hedges, and the potential risk to the value of protection purchased from vulnerable counterparties (like the financial guarantors). 

2008 0630 - FRBNY - FRBNY Observations on the Role of Supervision in the Current Financial Crisis - 10p

  • 2008 0125 - WSJ - Bond-Insurer Rescue Effort Faces Wall Street Skepticism, By Liam Pleven and Susanne Craig - [link]
    • By exploring a bailout of the nation's bond insurers, New York State Insurance Superintendent Eric Dinallo is tackling a problem that threatens Wall Street and ordinary investors alike.
  • 2008 0214 - GOV (House) - The State of the Bond Insurance Industry, Paul Kanjorski (D-PA)  ---  [BonkNote]
    • Dinallo, Ackman, Bachus, Spitzer, 
  • 2008 0214 - CNN - Finger pointing over bond insurer crisis - Congress drills into crisis that has shaken Wall Street. New York governor: 'The problems in this market will affect many average Americans.', By David Ellis
  • 2008 0225 - Standard and Poor's - Detailed Results of Subprime Stress Test of Financial Guarantors - 11p
  • 2008 0620 - MBIA - Press Release - Comments on the Impact of the Moody’s Downgrade of MBIA’s Insurance Financial Strength Rating to A2 on its Asset/Liability Management Business - 2p
  • 2008 0630 - FRBNY - FRBNY Observations on the Role of Supervision in the Current Financial Crisis - 10p
  • 2009 1117 - FCIC - Hearing - Financial Crisis Inquiry Commission - Timothy Geithner, Secretary of the Treasury - Closed Session  ---  [BonkNote]
  • 2010 0427 - FCIC - Interview - Transcript - Ilya Eric Kolchinsky - 55p
  • 2010 0310 - Transcript of FCIC staff interview with Thomas Maheras, Citigroup - 266p
      • Ambac
  • 2010 0513 - FCIC - Interview - Gus Harris - Moodys - Transcript - 185p
    • (p102) - Brad BONDI, FCIC - Help me understand here a private rating versus public rating, and then how a monoline
      comes in here.
  • 2010 0528 - FCIC - Interview - Transcript - Larry Summers - 80p
  • 2010 1011 - FCIC - Interview - Yves Smith  -  mp3
    • FCIC - Bond Insurers knew the bonds were not Triple A
  • 2010 1014 FCIC staff audiotape of interview with Kim Shaul, Wisconsin Office of the Commissioner of Insurance_1.wma
    • monolines - Ambac
    • <WishList> - Letter / Form from Wisconsin Insurance Commissioner re: ok for Ambac... Date-?
  • 2010 1020 - CNBC - Bond Insurers Need $20 Billion From Bailout: Dinallo - [link]
  • 2010 1022 - FCIC - Interview - Mark Adelson, Standard & Poor's - MP3
  • I asked explicitly about new liquidity exposure to the monolines or exposure we had not discussed, in particular through "collateral swap agreements".
    • Both Farber and Upton knew nothing about this, and said it was pretty much inconceivable to them that BSC would providing liquidity to monoline insurers.

2008 0130 - email - From: Eichner, Matthew, Subject: Upton/Farber call (Bear Stearns - BSC) - Monolines - 1p

  • 2010 0528 - FCIC - Interview - Transcript - Larry Summers - 80p
  • Present: Phil Angelides, Chairman, Christopher P. Seefer, FCIC,  Brooksley Born, Commissioner, Wendy Edelberg, Doug Holtz-Eakin, Commissioner
    • Larry Summers - Another who's difficulties also have contributed in a non-trivial way to the crisis is the bond insurance agencies. 
      • And the bond insurance agencies did dismally in many cases.
      • And the 1 thing that you can say about the bond insurance agency is that their failure was not due to the incentive problem that the credit agencies had.
        • They were in a position where they were on the hook if a bond they insured failed.
        • So they had massive incentives to avoid it, and made many of the errors that the credit agencies made.
      • So my instincts would be that it may slightly oversimplify what I think is a very deep problem to attribute it in a dominant way to incentive problems, rather than to intellectual problems, given the pervasiveness of the problem, even where there were very strong incentives to avoid.
      • Now again, particularly in the synthetics cooperative area, I think there were real questions that can be asked about the arrangement.
        • The issues are a place where I have had a little bit of an occasion to think about these issues.
      • Similarly, there are some similarities with the set of issues involved in the work of accountants auditing, designing tax policies, doing consulting business, how one draws lines.
      • There is a place where these things have been fairly substantially considered.
  • Chris SEEFER, FCIC:  So am I understanding you correctly that when it comes to the Ambacs and the MBIAs and I guess we can throw AIG in there when we talk about the bond insurers, that there was more a function of I guess a lack of intellectual firepower, so to speak?
  • Larry SUMMERS: Intellectual firepower, I think I would rather make the slightly more narrow statement that corresponds to what I have some chance of knowing.
    • Which is it wasn't an incentive problem, in the sense that they have very strong incentives to do right.
    • It was a judgment error, whether the judgment has to do with the unsatisfactory quality of information they received, or the intellectual judgments they made about that information, I don't have a basis for making any judgment at all about that question.
  • 206. In an effort to avoid having to recognize losses tied to its monoline counterparty exposures, Barclays joined a group of other Wall Street banks to bail out the insurers.
    • On February 1, 2008, TheStreet.com and other news agencies reported that a consortium of banks, including Barclays, were “working in conjunction with New York Insurance Superintendent Eric Dinallo to hammer out a bond insurer bailout plan.”
    • Barclays knew it had to bail out the monolines in order to stave off writedowns on its own mortgage-related exposure, because if the insurers failed, Barclays could no longer claim its exposure was insured or hedged by the monolines.
    • ⇒  As soon as the monolines could not backstop those losses the credit ratings on those bonds would fall, resulting in huge losses for Barclays.

2013 - LC - In re Barclays Bank PLC Securities Litigation, Case 1:09-cv-01989-PAC Document 66 Filed 09/16/13 Page 81 of 101 - 101p

  • 2010 0609 - FCIC - Re: Follow-Up to the Financial Crisis Inquiry Commission Hearing on April 7, 2010 - Alan Greenspan - 14p
    • monolines, state insurance regulation, risk transfer
  • (p33-34) - Daniel SCHWARCZ, Law Professor  - Correct, but monoline insurers, financial guaranty insurers did the exact same thing, and they failed miserably as well. State regulated insurance companies issuing financial guaranty insurers, they failed just as dramatically.
  • Brad SHERMAN (D-CA) - They failed to the point where they had to be bailed out?
  • Mr. SCHWARCZ. They didn’t—they failed to the point of insolvency, to the point of contributing mightily to the crisis, yes, because what happened is, all of a sudden, the financial guaranty insurers were providing—their classic business was to provide insurance against the default of local bonds and State bonds. When they failed and became insolvent to the point that no one had any faith in them, the entire bond market seized up because there was no financial guaranty—
  • Mr. SHERMAN. But we in Congress didn’t have to bail them out?
  • Mr. SCHWARCZ. I don’t believe that any of them received bailout funds.

2014 0520 - GOV (House) - Legislative Proposals to Reform Domestic Insurance Policy, Randy Neugebauer (R-TX)  ---  [BonkNote]