Monday, July 12, 2010

Selling Your Credit Rating

Bonus financial nerd reading today because it's a little slow at Kenny K Headquarters, what with Summer vacation and all.

Long, but interesting post by Bronte Capital on the bond insurers who were basically selling their credit rating in the name of bond guarantees. Folks like MBIA looked to have a wonderful business model. They guaranteed a bond rating on a bond in return for large fees. The thought was that with some savvy analysis, they could identify the bond offerings that were destined to default and avoid guaranteeing them. Of course they would miss some, but they could diversify that risk away if they guaranteed a lot of bonds. Both true, but the gentleman from Bronte makes the case (convincingly) that they stopped doing the analysis and then were hit by the unexpected whammy of fraud in the mortgage market. The firm is still alive but on its last legs. The article is worth a read. I found it riveting, but I'm a finance nerd.