News item (BN) CIBC's Big Subprime Secret Might Cost Billions
Our pal Fletch: How bout this one? Some nice work from Bloomberg’s Jonathan Weil...
CIBC's lightly guarded secret is the name of a ``U.S. financial guarantor'' that faces a possible downgrade on its A credit rating and is ``not necessarily rated by both Moody's & S&P.'' That's how CIBC last week described the company that is insuring $3.47 billion, or about a third, of the collateralized debt obligations it holds that are tied to U.S. subprime mortgages.
The company's identity matters because the bank said these hedged CDOs were worth just $1.76 billion at Oct. 31, down almost half from their face amount. If the guarantor goes poof, CIBC loses its hedge on these derivative contracts. And the Toronto-based bank would have to recognize the loss.
Eric: Ah, name the monoline. ACA…DING DING DING! Well there’s a few loonies flushed down the toilet because ACA has been toast since 2006!
Rich: Hah! Look at this quote: “It's unclear why CIBC thought it made sense to have a small A-rated insurer guarantee a third of its AAA-rated ``super senior'' CDO holdings. This would be like paying your middle-class friend to insure your 100-foot yacht. Perhaps it just wanted to say it was hedged, and didn't think about needing to file a claim someday.”
Eric: Now you know what’s really funny? I bet a lot of guys are laughing about this, maybe at some big shops that have somehow magically avoided the “major credit hits.” Meanwhile, they got THEIR hedges with the GOOD monolines…..like MBIA and AMBAC.
Rich: Right. Umm, If I was at these larger shops I would be pooping my drawers and praying that they can keep the “GOOD” monolines AAA.
Eric: At least in time to collect my RECORD SETTING bonus.