Friday, 25 July 2008

And now you die...

This was my favourite blog title of the day: And now young monoline... you will die. Accrued Interest makes some good points, and indeed it must be frustrating trying to run a monoline when one's de facto regulator, the ratings agencies, keep changing the capital model. However:
  • It was clear that the capital models used up to mid 2008 were flawed, and so volatility in capital required for a AAA was to be expected.
  • One of the key parts of an insurer's business model is time diversification. Business underwritten in one year diversifies that written in another, and losses in one year - subject to enough capital being available to continue - can be offset by higher premiums the next year. For the monolines though this does not work any more as there is much lower demand for muni wraps and those that are getting done are mostly being written by Berkshire. So the agencies are right to account for this change in their re-rating of the monolines.
Anyway, Bill Ackman might fancy being able to buy another small country, so it is about time for another wave of monoline downgrades.

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