The Bond Insurance Version of “My Dog Ate My Homework”
Posted by T.W. Hanson - Mar 3rd, 2008 at 21:03
Radian Group, one of the bond insurers, notified investors and the SEC today that they are unable to file their annual report. When a company cannot file a report on schedule, they must cite reasons. Radian’s was that they couldn’t keep people employed who knew how to value their assets. Their exact wording follows.
We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements. Specifically, this deficiency resulted in audit adjustments to Derivative Liabilities and Change in Fair Value of Derivative Instruments line items in the consolidated financial statements for the year ended December 31, 2007 primarily arising from insufficient (1) identification of derivative instruments; (2) review, approval and testing of complex derivative valuation models, including assumptions, data inputs and results; and (3) identification of contract terms and transactions requiring consolidation in accordance with generally accepted accounting principles, related to such financial statement line items.
Wow! Is this what the end of capitalism looks like?
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This is hardly the end of capitalism, it’s the end of one company. This is how markets work, if one company fails, the others with step up or a new one will enter the market.
Comment by Brandon H — March 4, 2008 #
I agree with you that an isolated incident of corporate self-immolation hardly constitutes the end of capitalism.
Where we differ in point of view appears to be in the the meaning of, “Is this what the end of capitalism looks like?” I do believe that if our free market economic system fails it will look much like this. In such a world, employees will lose faith in corporations and leave. This is exactly what happened on a smaller scale at Radian.
On the likelihood of a company stepping in to take over Radian’s business, I disagree. The business of insuring securities backed by mortgages is not one people are seeking to enter.
This is where you will say that they shouldn’t have been in that business in the first place.
The fact is that the free market capitalistic system in which we operate has supported their business for decades. Banks like Citigroup, Morgan Stanley and Merrill Lynch depend on the Radians in the world to insure the securities they hold. If Radian and its peers in the bond insurance industry world fail, the banking sector would be forced to write down trillions of dollars worth of securities. UBS now predicts that the current credit crisis will cost the banks $600 billion. Compound that with mortgage insurance failures and the banking system of North America may not survive.
We are operating in a hypothetical world of numerous what ifs, and I do not believe we will lose the banking sector of the United States.
However, I find it astonishing to see how a few handfuls of company failures could bring down the entire economic system in which we live.
Comment by T.W. Hanson — March 5, 2008 #