Any one hear of a company called ACA

discostu · January 6, 2008, 12:11am

Found this in an article by John Mauldin an American financial analyist
any one ever hear of ACA

Many investment banks favored CDOs that contain these credit default swaps, because they didn’t require the purchase of securities, a process that typically took months. With credit default swaps, a billion-dollar CDO could be assembled in weeks.

“UBS Investment Research estimates that CEOs sold credit protection on around three times the actual face value off triple-B-rated subprime bonds. 'The use of derivatives “multiplied the risk,” says Greg Medcraft, chairman of the American Securitization Forum, an industry association. ‘The subprime mortgage crisis is far greater in terms of potential losses than anyone expected, because it’s not just physical loans that are defaulting.’”

The article goes on to detail how the entire CDO world is one large daisy chain of credit default swaps. Who’s got your back? And who’s got the back of the guy who has your back? And … you better hope it is not ACA.

Never heard of the company? You will. ACA has dropped 95%, from $16.55 to $0.86 today. Why? Because the company sold credit insurance on CDOs. “If now junk rated ACA can’t come up with an additional $1.7 billion in capital by January 18, it will be insolvent and the $69 billion in credit default swaps on CDOs it underwrote will be worthless.” (Shilling) $69 billion? That is huge. Think that won’t hurt balance sheets all over the world?

Green_Bear · January 6, 2008, 12:16am

Yup , they cropped up in the news back in July when subprime blew up.

ACA CAPITAL, A LEADING INSURER OF SUBPRIME mortgage-bond securitizations, is drawing relentlessly closer to “bagel-land” – that dismal place where a stock’s price is zero – with its shares sinking in recent months from around 7 to a low of 1.51 late last week.

The proximate cause of this slide was the disclosure on Nov. 9 that Standard & Poor’s had put ACA (ticker: ACA) on negative Creditwatch and might cut its credit rating from the current single-A.

In the third quarter, ACA insured $7 billion in shaky collateralized paper.

Such a reduction would be catastrophic for ACA. Any rating below single-A-minus would force the insurer to post margin of $1.7 billion or more on its $25 billion book of subprime collateralized mortgage obligations, to reflect the mark-to-market losses that it has already acknowledged on this portfolio.

In the third quarter, ACA took a pre-tax write-down of $1.7 billion, $1.5 billion of which stemmed from the decreased value of its subprime guaranteed portfolio. That helped push the company’s financial results, as reported under generally accepted accounting principles, to a loss of $1 billion, and its GAAP net worth to minus $888 million. >>>>

CDO Dumping Ground Still Sinking
online.barrons.com/article/SB119 … 96340.html

verbatim · January 6, 2008, 2:21am

CIBC are in trouble because they took out a big hedge with ACA. The hedge might have been a good idea, but their chosen counterparty wasn’t.

From the WSJ: Ratings Move Roil Bond Insurers
The first potential casualty that went public was Canadian Imperial Bank of Commerce, which said it is a hedge counterparty with ACA Financial on about $3.5 billion in U.S. subprime real estate. CIBC said it could report a large fiscal first-quarter charge related to ACA Financial's rating cut and its ability to remain as a viable counterparty.
The informed speculation was that CIBC’s counterparty was ACA. That was confirmed by CIBC this morning.

calculatedrisk.blogspot.com/2007 … ional.html

southofdub · January 6, 2008, 9:18am

This is from John Maudlin’s newsletter.

Who’s Got My Credit Default Swap Back?

My middle son is an online gamer, typically playing combat games with teams formed by players from around the world. To advance in the rankings, you have to work together. “I’ve got your back” is a frequently heard term in my house. If no one has your back in the gaming world, you can be pretty sure that the enemy will soon be there and you will be a statistic.

The “back” for the mortgage investment business seems to be particularly absent. As in the online gaming world, it could get ugly really quick. And a lot uglier than I thought just a few weeks ago.

In a brilliant article in the Wall Street Journal, Carrick Mollenkamp and Serena Ng detailed the rise and fall of a collateral debt obligation (CDO) called Norma, ushered into existence by Merrill Lynch. This is a $1.5 billion CDO created in March of 2007 with over 90% of its paper rating “A” or better, and $1.125 billion rated AAA. In November 2007, the entire CDO was downgraded to junk.

That is not particularly news, as there are a lot of subprime CDOs that are being downgraded. What caught my eye was how this CDO was created. Quoting (and emphasis mine):

"For Norma, [the manager] assembled $1.5 billion in investments. Most were not actual securities, but derivatives linked to triple-B-rated mortgage securities. Called credit default swaps, these derivatives worked like insurance policies on subprime residential mortgage-backed securities or on the CDOs that held them. Norma, acting as the insurer, would receive a regular premium payment, which it would pass on to its investors. The buyer protection, which was initially Merrill Lynch, would receive payouts from Norma if the insured securities were hurt by losses. It is unclear whether Merrill retained the insurance, or resold it to other investors who were hedging their subprime exposure or betting on a meltdown.

"Many investment banks favored CDOs that contain these credit default swaps, because they didn’t require the purchase of securities, a process that typically took months. With credit default swaps, a billion-dollar CDO could be assembled in weeks.

“UBS Investment Research estimates that CEOs sold credit protection on around three times the actual face value off triple-B-rated subprime bonds. 'The use of derivatives “multiplied the risk,” says Greg Medcraft, chairman of the American Securitization Forum, an industry association. ‘The subprime mortgage crisis is far greater in terms of potential losses than anyone expected, because it’s not just physical loans that are defaulting.’”

The article goes on to detail how the entire CDO world is one large daisy chain of credit default swaps. Who’s got your back? And who’s got the back of the guy who has your back? And … you better hope it is not ACA.

Never heard of the company? You will. ACA has dropped 95%, from $16.55 to $0.86 today. Why? Because the company sold credit insurance on CDOs. “If now junk rated ACA can’t come up with an additional $1.7 billion in capital by January 18, it will be insolvent and the $69 billion in credit default swaps on CDOs it underwrote will be worthless.” (Shilling) $69 billion? That is huge. Think that won’t hurt balance sheets all over the world?