Note: this post is by Thomas Adams, at Paykin Krieg and Adams, LLP, and a former managing director at Ambac and FGIC, with some minor additions by yours truly. This is a significant piece of some puzzles he, some other experts who prefer to remain anonymous, and I have been pushing on for several months.
Nov. 24, 2009 (Naked Capitalism) -- As we have been reading the latest coverage on the AIG bailout from the SIGTARP report and the Treasury Secretary Geithner’s Congressional testimony, a nagging question remains unresolved: why did AIG get bailed out but the monoline bond insurers did not?
The business that caused AIG to blow up was the same that caused the bond insurers to blow up – collateralized debt obligations backed by sub-prime mortgage bonds (ABS CDOs). This was actually one of the few business that AIG Financial Products had in common with the monolines. AIG didn’t participate in municipal insurance, MBS or other ABS deals, which were all important for the monolines.
Certainly, AIG was larger than any of the bond insurers, but in aggregate, the bond insurers had a tremendous amount of ABS CDO exposure, which at the peak was probably over $300 billion. Despite AIG’s claims to have withdrawn from subprime at the end of 2005, we have identified particular 2006 deals with substantial subprime content that AIG most assuredly did guarantee.
In addition, the monolines had exposure to many other assets classes that AIG did not which created chaos for the holders of those bonds when the monolines were downgraded. The chain reaction risk of the bond insurers was arguably greater, when you throw in the damage to the aucton rate securities market, which was rooted in the muni market. In 2007, MBIA had over $650 billion of par insured, Ambac had about $500 billion, FSA had about $380 billion and FGIC had about $300 billion. Throwing in CIFG and XLCA, the total insured par of the monolines was about $2 trillion – this amount certainly would qualify as large enough to be “systemic risk” if the insurers were allowed to fail.
In contrast, while AIG’s aggregate insured par was greater, the only portion that really presented a systemic risk exposure was the CDS and structured finance exposures, which had an aggregate par exposure of about $400-500 billion. a persuasive argument could be made that the monolines were just as intertwined in the financial system as AIG and, thanks to their municipal exposure, presented as great or greater a systemic risk to the financial markets and the economy.
Yet AIG was bailed out and the monolines were not.
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