Tag Archive for 'AGO'

Assured Files Suit Against Credit Suisse: Will There Soon Be Another Settlement?

Posted on October 25, 2011, 9:47 am. Closed

Assured Guaranty (AGO) filed suit against Credit Suisse (CS) last week. Here is a copy of the complaint. AGO wants CS to repurchase $1.8 billion in defective mortgage loans. The underwriting standards for these loans were just as egregious as what we’ve seen with the likes of Countrywide and WaMu. Approximately 93 percent of the 7,918 mortgage loans that Assured has reviewed breached one or more of the Mortgage Representations.

In the court filing there are lots of great examples of the lack of underwriting standards. One example of CS failing to fully investigate the borrower’s existing debt obligations: a re-underwriting of a $269,500 mortgage loan revealed that the borrower opened six mortgages totaling $1.7 million within 30 days of the subject mortgage loan’s closing date—a recalculation of the debt to income ratio yielded 135% which exceeds the max allowable DTI ratio of 60%.

Another excellent example is in regards to a failure to verify income. One borrower obtained a $479,900 mortgage loan claiming to be the owner of a maintenance and painting business with income of $358,800 per year. It turns out the actual income was $46,959 which gives a DTI ratio of 327%, exceeding the max allowable ratio of 60%—over 5 times the limit!

I suspect in the next 6–12 months there will be a settlement very similar in structure to the recent Bank of America/Countrywide settlement, meaning that AGO will likely receive about $1 billion in cash up front and another several hundred million later on along with some type of reinsurance or indemnity agreement.

Bank of America Settles With Assured Guaranty (AGO)

Posted on April 15, 2011, 7:28 am. Closed

Bank of America recently agreed to pay Assured Guaranty (AGO) $1.1 billion in cash to settle AGO’s claims related to rep and warranty breaches on RMBS deals AGO insured. The deal also includes a loss-sharing agreement worth about $470 million to AGO. AGO received $850 million yesterday, which is worth about $4.62 to AGO. AGO’s shares are up over 25% on this news. And there is still another $720 million in value that is due to AGO, or another $3.92 in value.

Like I’ve said before, it is just a matter time before other banks settle with AGO. However, headline risk still remains in regards to the fiscal problems of cities and municipalities and will likely stick around for another year or maybe two, which means the price of AGO will likely remain volatile. But again, it is just a matter of time before these problems are solved. At current prices, AGO might be an even better bargain due to the increased likelihood of additional, positive legal outcomes.

CEO’s Letter to MBIA Shareholders

Posted on March 21, 2011, 7:34 pm. Closed

MBIA recently posted online the CEO’s letter to shareholders. MBIA’s current problem stems from the overhang of legal problems stemming from the company’s transformation in 2009, which essentially split the company into a good part and a bad part. This occurred near the height of the financial meltdown and needless to say, all the big banks did not like this and I’m sure most of them felt MBIA was insolvent at the time and the transformation was just an attempt on the company’s part to avoid paying claims. I believe this is the primary reason why the big banks banded together to sue MBIA to reverse the transformation.

However, now its two years later and MBIA is still around and still making payments to claimsholders. In fact, in the last quarter of 2010, over one third of the original bank plaintiffs have withdrawn their claims against MBIA. It’s my belief that these banks know they do not have a good case because their argument that MBIA is insolvent is now moot.

Right now, MBIA stock is trading back at where it was prior to the flurry of announcements that banks like JPMorgan had withdrawn their claims. I believe its just a matter of time before this issue is finally resolved in MBIA’s favor. After this, MBIA the ratings agencies will likely upgrade MBIA and MBIA will be able to start insuring muni bonds again. This won’t happen this year, but most likely next year.

MBIA is also still progressing with its fraud lawsuits against the financial institutions. There will be a trial in the Bank of America/Countrywide case late this year, followed by a trial in the Ally Bank case in 2012. I believe the defendants in both these cases will settle a day or two before trial, if not on the footsteps of the courthouse on the day of. The underwriting standards of these financial institutions were just egregious. And if the banks did not lie to MBIA and other bond insurers, then they were totally negligent. I do not see how a jury could favor the side of the banks. I do not know why these financial institutions would want to air even more of their dirty laundry.

Some have likened value investing to time arbitrage—from the point after you purchase an undervalued security up to the point where it reaches intrinsic value, time elapses. Patient, confident investors with long time horizons are able to take advantage of this time arbitrage. This is one of the main reasons why value investors outperform the indexes. Companies like MBIA or AGO I think are perfect examples of time arbitrage—I am confident its only a matter of time before both companies recover, and when they do, shareholders will have earned outsized returns.

Subprime Was Subprime, But Prime Turned Out to be Subprime Too

Posted on February 17, 2011, 8:49 pm. Closed

On February 16, the New York State Assembly Standing Committee on Insurance held a hearing on financial guaranty insurance and representations and warranties in securitized debt transactions. Back in 2007 and 2008, many of the monolines like MBIA, Ambac, and Radian got into big trouble insuring RMBS. Underwriting standards were especially egregious on the part of the originators and the banks who did the securitizations essentially committed fraud when they represented and warranted to the monolines conformed to the underwriting standards set out in the insurance agreement.

Joeseph Brown, CEO of MBIA, testified before the Committee and gave a very good background of the financial guarantee industry and “how the fraud, misrepresentations and failures of certain securitization sponsors to honor their representations and warranties on residential mortgage-backed securities that we insured have led to billions of dollars of claims on MBIA’s policies.”

Most interesting to me is this statement (from which I derived the title of this blog post):

These reps and warranties were critical to us, as these criteria were a key determinant of the quality of loans eligible to be included in the loan pool – and consequently, how the pool could be expected to perform. Interestingly, during this same time period, we insured several billion dollars’ worth of subprime mortgage securitizations. We required overcollateralization consistent with subprime loans because the pools were accurately represented to us, and we understood that they posed a higher risk than securitizations of prime loans. Ironically, these subprime transactions have performed with virtually no losses. Our losses have actually come from securitizations of what were represented to us as pools of prime loans – which, as a result, were structured with less overcollateralization. But because the quality of the loans was misrepresented, and they turned out to be anything but prime, the performance of the securitizations has been abysmal.

Thus far, MBIA has paid out over $4.2 billion in claims and the Company expects to recover about $2.2 billion as of September 30, 2010. After reading through the lawsuits filed by MBIA and Assured Guaranty against these banks, I expect both companies to experience continued success in recovering what they have paid out. When over 80%-90% of loans in a securitization breach a rep and warranty, it is just sickening to see banks avoid their contractual obligations.

Meredith Whitney is Full of It

Posted on February 1, 2011, 2:18 pm. Closed

I’m even more convinced that Meredith Whitney and other doomsayers are full of crap in regards to the impending “muni crisis.” I just read these two posts:

Things are rarely ever as horrible as they seem and are rarely as wonderful as they seem. I also believe there is a lot of data out there to support my belief that there is not going to be a muni crisis that will cause investors to lose huge amounts of money.

Right now I am doing lots of research on the bond insurers AGO and MBI. I also believe there are great opportunities in the tax-free income closed-end funds, especially those that are trading at a discount to NAV.

Is There Anything Assuring About Assured Guaranty?

Posted on February 1, 2011, 5:57 am. 2 Comments

In the past three weeks, Assured Guaranty (AGO) has gone from $19.50 to $14.50. The newest and biggest and fear is that S&P might downgrade AGO due to changes in its rating system, meaning that AGO could be forced to raise additional capital.

Some background on AGO…

Although AGO had to raise capital and accept a $1 billion investment from Wilbur Ross, AGO still did a much better job of underwriting and managing the credit crisis than their rivals like MBIA and Ambac. AGO even managed to acquire FSA, a large muni bond insurer, expanding their market dominance. AGO is basically a monopoly right now—it was the only company writing new insurance on municipal bonds during 2010.

AGO also had a AAA until S&P downgraded them to AA+ in October 2010. AGO claims the October downgrade was unwarranted and was due to changes in criteria as opposed to changes in AGO’s capital position and risk portfolio. Furthermore, S&P did not provide clarity on their capital evaluation and the stress loss scenario S&P imposed seemed to be unduly harsh—1,600 bank failures and 25% unemployment.

Another thing I like about AGO is that value investor Bruce Berkowitz is high on MBIA. If he could purchase more of the stock he would, but New York State law prevents an investor from going above the 9.9% threshold. If Berkowitz is high on MBIA, a less well-run company compared to AGO, this gives me greater confidence in AGO.

Other Fears

Some other fears affecting investors is the impending muni crisis. Thanks to doomsayers like Meredith Whitney, investors now have a totally irrational fear that there will be hundreds of muni bankruptcies and even states going bankrupt. I see a host of reasons why things will not be as bad as they seem right now. Tax revenues for 2010 are going to be higher than they were in 2007. In the past several weeks, we’ve seen elected officials making tough decisions about their budget problems or getting prepared to make those tough decisions. Then there are simple facts like the costs of bankruptcy can easily outweigh any benefit. It’s also damn hard for a municipality to successfully file for Chapter 9, as it must: (1) be specifically authorized by state law to be a debtor (and there are only 27 states that authorize this); (2) demonstrate insolvency; (3) must be voluntary; and (4) must show proof of an attempt to avoid filing.

There’s also the fact that Chapter 9 has been pretty rare since the creation of the law in 1934. And the majority of debt defaults have occurred with unrated issues. AGO has only underwritten “BBB” or better rated bonds—78% of AGO’s net par outstanding is “A” or better.

Pundits also make bankruptcy sound like an easy choice. It’s not. Warren Buffett has also declared his fears and also stopped underwriting new business after 18 months. And as for Buffett, I would watch very closely to see if his words match up with his actions. I wouldn’t put it past him to play up the possibility of bad things happening in the muni debt markets so that he has a better opportunity to come swoop in on all of the deals when they arrive due to irrational selling.

I also like the fact that the buy-side dominated the questioning in the most recent quarterly conference call I listened to. I think there were a total of 5 different hedge funds represented versus 3 sell-side firms. And guess which group was asking the better questions? I have literally never experienced this before with a conference call. The fact that the buy-side is so well represented on a conference call is a positive sign for me.

Then there is the large discount to book value and huge discount to adjusted book value. And then there is the ongoing success of bond insurers and Fannie and Freddie of achieving rescissions and put-backs. Bond insurers could recover more than $4 billion from banks for breaches of representations and warranties on RMBS they guaranteed…

You get the point. I think there’s a whole lot of good news on the horizon and not much else can go wrong that hasn’t already gone wrong in the past three years.

Today AGO is holding a conference call to speak about S&P’s changes. I’ll be listening. Whatever AGO decides it needs to do, it will be positive for the stock price at current levels. If AGO needs more capital, then great—it gets more capital which it probably won’t need and the stock responds positively from these levels. If AGO doesn’t need more capital, then great—the stock responds positively from these levels.