Bond insurers – knocked down enough for a helping hand?

February 11, 2008

beat-boxer.jpgAre bond insurers beaten down far enough to be a good private equity bet?

That’s a question financier Wilbur Ross has been asking himself – and it takes time to reach the answer.  “They’re very complicated to analyze,” he told Reuters in an interview. “These are very due-diligence intensive situations.”

He explained that the companies’ portfolio holdings are largely CDOs (collateralized debt obligations)” and in some cases CDOs of CDOs, so to get down to the underlying securities you have to go through layers”. 

“A typical financial guarantee insurer might have something like 3,000 of these asset-backed securities in its portfolio but when you dig into them, the underlying securities are probably 15 or 20,000. So just the analytical chore is quite considerable.”

One driver for any potential acquisition are the high barriers to starting up a bond insurer from scratch.

“If we were born with a Triple A rating like Warren Buffett is or like AIG is, perhaps there would be no need to do that,” Ross answered, when asked if he’d contemplate setting up a bond insurer rather than investing in an existing one.

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