WASHINGTON - Two days before a House Financial Services Committee capital markets hearing on bond insurers, a panel that included hedge fund managers who are betting against the insurers offered less than encouraging observations about financial guarantors yesterday.
Amid insurers' enormous mark-to-market losses and rating downgrades, Rep. Paul E. Kanjorski, D-Pa., chairman of the House Financial Service capital markets subcommittee, announced last month that he has launched an inquiry into their industry and asked federal and state regulators for information, including whether statutory reforms are needed.
Yesterday's panel, sponsored by the Hudson Institute, a think tank that promotes economic freedom, comprised William Ackman, an outspoken critic of the bond insurers and a managing member of Pershing Square Capital Management LP, Jim Chanos, managing partner at Kynikos Associate LP, Sean Egan, founding principal of Egan-Jones Ratings Co., Ed Grebeck, chief executive officer of Tempus Advisors, and Joseph Mason, who teaches finance at Drexel University.
Ackman and Egan said some bond insurers will soon enter a period of so-called runoff mode in which the financial guarantors stop writing new business. Though considered a worst-case scenario for financial guarantors, the probability of insurers entering runoff mode is "high because of a belief that the claims are going to vastly exceed their capital," Ackman said.
While in runoff mode, a bond insurer over time renews its capital reserves through investment income. Its reserves also free up as the bonds it insures mature or are called.
Though Kanjorski's staff declined yesterday to release a list of participants in tomorrow's hearing, Ackman said that he would testify.
However, Ackman said that he was supportive of Warren Buffett's offer to reinsure $800 billion of municipal securities insured by three of the largest bond insurers, which would free up capital to handle losses on their structured finance products that they have also insured.
He said rating agencies should also consider shifting to a corporate ratings scale for municipal securities, which, if combined with moves to reinsure munis, would "significantly mitigate the risks" that bond insurers are exposed to.
Though the panelists praised Buffett's offer, they all appeared to agree that none of the insurers would take it.
Jim Chanos, managing partner at Kynikos Associate LP, who also spoke on the panel, said, "No one in their right mind will take that for obvious reasons," adding that the insurers currently "can't afford to."
Meanwhile, Chanos warned that state and local governments face an equally large crisis tied to the costs of unfunded post-retirement health care obligations, an observation that appeared to repeat the concerns expressed by municipal market participants for years. q