Subprime's Ultimate Time Bomb?
By Jonathan R. Laing
DESPITE A GLOSSY ROSTER OF OWNERS LIKE Bear Stearns Merchant Bank and New York investment company Third Avenue Trust, ACA Capital (ACA) has flown under Wall Street's radar for most of its 10-year history.
And perhaps that has been a good thing, given ACA's rather picaresque history. The firm's founder, H. Russell Fraser, often arrived at the New York headquarters in full Marlboro Man western regalia -- until he was sent packing to his ranch in Wyoming in 2001 as a result of lousy numbers in ACA's original business of insuring low-rated municipal-bond issues. Then in 2004, ACA suffered the ...
Here is a summary of this story from a CR reader:
Barron's has a big piece today on ACA Capital ( 27 percent owned by BSC by the way 1 ) Here are the highlights : 1) ACA has a market cap of 260 million but has insured 15.7 billion of mostly subprime securities. Notably , 9.3 billion of this waste is in mezzanine subprime CDOs ; 2) ACA"s total CDO exposure is 61 billion ( subprime and commercial mortgage debt ) on their capital base of 326 million , which equates to leverage of 180 to one : 3) ACA has been criticized by some as being a warehouse ( or perhaps toilet ) for the risky obligations of big boys such as MER , LEH ,BSC and RBS Greenwich Capital ---billions of such obligations have been parked in ACA by these big boys : 4) If ACA collapses, these risky obligations come cascading back onto the books of the big boys and some of ACA's 25 other counterparties; 5) Barron's further notes a high level of risk of the 9.3 in mezzanine risk exposure being pancaked with just a 7 percent collateral impairment spread across the pool underlying the mezzanine CDOs (note the mezz CDOs consist of BBB slices of MBS pools ; 6) S&P has forecast 11-14 cumulative losses for 2006 vintage subprime mortgages ; Half of ACA 9.3 billion in mezz guarantees consists of 2006 paper , while the balance is 2005 and 2007 paper that has not performed much better ; Finally , ACA has 5 billion in "high grade" subprime CDOs of which 2/3 is Single A tranches .. a 10 percent collateral loss wipes out the single A tranches and 2/3 of any high grade CDO they are a part of... ACA thus has a 3 billion exposure on this 5 billion exposure.... capped off with about a half billion more risk from CDO squared products which get snuffed with a 4.5 collateral loss. ... The mess just keeps expanding and the opaque risks are becoming visible. I wonder if BSC , MER and LEH will disclose this by way of a 10Q August 9th , which is when I understand 10 Q'a are due for the second quarter ? Thoughts ? ?