Monday, June 23, 2008 3 comments ++[ CLICK TO COMMENT ]++

Monoline News: Dexia Injects $5 Billion Into FSA; Talk of Commuting Insurance Contracts

Another news-filled start in the world of bond insurers...

Dexia, the French bank, injected $5 billion into FSA (via a credit line). This is in response to William Ackman's assertions that FSA is the next big one to fall due to deteriorating assets. I think William Ackman is going to be proven wrong with his claim but that doesn't mean he won't make money off this. Dexia's stock sold off last week, and FSA's CDS seems to have widened so he is likely already in the black. I think his strategy will fail in the end because he needs to introduce doubt about Dexia and that's much tougher. Since FSA has largely steered clear of the questionable subprime mortgage insurance, Dexia is likely to support FSA. As long as that happens, Ackman will be wrong unless he can bring down Dexia.

In other news, Financial Times is reporting that MBIA, Ambac, and FGIC are discussing with the insurance buyers (mostly banks) of ways to commute (cancelling) some of their insurance contracts. This is something that some have mentioned may happen. Although this can benefit shareholders if a reasonable deal is worked out, there is a big risk that the monolines may give up a huge chunk of their equity or future profit potential in order to cancel the contracts.

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3 Response to Monoline News: Dexia Injects $5 Billion Into FSA; Talk of Commuting Insurance Contracts

June 23, 2008 at 6:53 PM

FSA's investment portfolio...Oops!

My guess is the $5B credit line will be used rather quickly -- if it is not pulled.

I question FSA's parent's willingness to throw money down the garbage shute when things continue to deteriorate.

Btw, the Bill Miller Fund Death Watch continues: Today's NAV dropped a further 1.45%. Is shorting his fund holdings really as easy as shooting fish in a barrel?

June 24, 2008 at 11:00 AM

If I'm not mistaken, FSA is one of the biggest operating units for Dexia, so I think they will support it unless it becomes uneconomic. Even if they take some losses, it makes sense for the parent to support the unit (eg. if FSA loses 10% of its portfolio, that's a loss of around $1billion to $2 billion, which is likely much lower than the value of FSA as a going concern.)

As for FSA's portfolio, it's hard to say. Just because it contains subprime, for example, does not mean it is necessarily bad. Most of the pre-2005 subprime debt is performing acceptably so it all comes down to the details.

As for Bill Miller, let's revisit him in 2 or 3 years... you should lay off beating someone who is down... I think his returns will be poor until the oil market corrects. Right now, the short-term investors are going short financials and long energy (because that's what works)...

June 24, 2008 at 1:37 PM

Re: Miller

Actually that was a rhetorical question....shorting is never easy. I wouldn't short his fund holdings at this stage. Miller is about to get a short-term reprieve on his dogs -- MBIA and Ambac excepted.

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