Tuesday, July 22, 2008 2 comments ++[ CLICK TO COMMENT ]++

Assured Guaranty Being Sold Off... But a Potentially Positive Sign

UPDATE: An anonymous reader pointed out that the mark-to-market gains seem to be due to marking down liabilities. So this isn't as positive as it seems (I retract my somewhat-bullish opinion :( ). One of the quirks of fair value accounting is that you can end up with positive results simply because the value of your debt went down, for example. I haven't calculated it but I think companies like Ambac would have negative book value if it weren't for this benefitial result (I mentioned this before.)

Assured Guaranty is off 50% in heavy trading and I'm not sure what it will do now. I guess the likely rating cut of AGO and FSA likely means the Connie Lee idea is off the table for Ambac. Anyway, there was one positive piece of news that Assured Guaranty released in their earnings call. Around $500m of their mark-to-market losses reversed in the last quarter. I don't know the breakdown of Assured's insurance portfolio but this is a positive sign. The monolines, as well as the banks, are not going to get out of the mess until the marks reverse. The Assured reversal is a first sign. Although things may deteriorate further (they may have in the last month,) it is still a good sign...


2 Response to Assured Guaranty Being Sold Off... But a Potentially Positive Sign

July 22, 2008 at 11:55 AM

The reason the marks reversed was due to the CDS on AGO widening. From the release:

"The fair value of its financial guaranty contracts written in CDS form also reflects the change in the Company's own credit cost based on the price to purchase credit protection on Assured Guaranty Corp., the Company's financial guaranty direct subsidiary. Assured's current estimate of after tax unrealized gains on derivatives of $475 million to $525 million includes a gain of approximately $675 million after tax (approximately $958 million before tax) associated with the change in Assured Guaranty Corp.'s CDS spread, which widened substantially during June."

To me, this shows the silliness of current MTM accounting. In otherwords AGO equity shot up 35% becase the company is now less credit worthy? (Again, see today's release.)

July 22, 2008 at 2:36 PM

Thanks for providing further info...

I think fair value accounting is dumb (at least for investors) but what is happening makes sense. You need to mark the liabilities side if you are going to apply it to the assets side. Companies like Ambac probably will have negative book value if it weren't for marking down the liabilities because debt costs have gone up...

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