VIDEO: Bond Insurers: Fraud and Cancelling CDS Contracts
CNBC's Squawk Box – January 25, 2008

Berkshire Hathaway Assurance, a new entity, says that it will do premium business at premium prices, but it is happy to do zero business if risk is not priced correctly. It has the advantage of having ample capital, a credible AAA rating, and the added credibility of being part of Warren Buffett’s Berkshire Hathaway conglomerate.

Unfortunately, the largest legacy municipal bond insurers, MBIA and Ambac (along with CIFG, FGIC and SCA) were not as careful in their underwriting standards and have large exposures to subprime loans. Rating agencies are set to downgrade the legacy financial guarantors known as the monoline insurers (MBIA, Ambac, FGIC, CFIG and SCA).

Ms. Tavakoli points out that while rating agencies did not follow fundamental statistical principals when rating these products, it is the investment bank underwriters of subprime loan backed investments that bear the bulk of the responsibility. The investment bank underwriters are obliged to perform due diligence appropriate to the circumstances and are obliged to disclose all material information to rating agencies and investors.

New York Insurance Superintendent. Eric Dinallo is asking investment banks that did business with the legacy insurers to consider a bailout (or consider taking back their positions), and the investment banks are taking him very seriously according to Ms. Tavakoli. The bailout may be insufficient to save the “Triple-A” ratings that these insurers no longer merit, however.

At the time of this taping (January 25, 2008), CNBC’s on air editor, Mr. Gasparino. loudly refuted Ms. Tavakoli’s assertion and he proclaimed the banks were not taking the regulator seriously, but subsequent events proved him wrong and proved her correct.

Disclosure: At the time of this interview, Ms. Tavakoli owned shares of Berkshire Hathaway (BRKA)

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)


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