Bond Insurers: Fraud and Cancelling CDS Contracts (Video)

CNBC's Squawk Box – January 25, 2008


»VIDEO: Bond Insurers: Fraud and Cancelling CDS Contracts

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: Ms. Tavakoli owns shares of Berkshire Hathaway (BRKA)

Clients of Tavakoli Structured Finance also have access to proprietary TSF research, which is not published in any other paid or public forum.

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