Tuesday, January 29, 2008
Let's hope they do better with this one.
The bond/derivatives market seems to like the intentions of the New York Insurance Department with respect to bond insurers. The graph below shows the price of Credit Default Swaps for some major bond insurers. This instrument is quoted in basis points (0.01%) and as a 'spread' premium analogous to the yield difference between the indicated credit and an interbank rate. So higher CDS prices indicate a higher price to hedge the issuer's credit risk, or deteriorating credit:
For those of you who don't follow these markets, the incredible decline of priced credit quality starting last summer may be a bit of a shock. This is cliff-diving of the first order. The sharp bounce-back after the insurance department announcement is also a little startling. Whether you think the run-up or the bounce-back is exaggerated, these price swings suggest herding among the hedging and speculative buyers.
I have trouble imagining the Insurance Department effort as analogous to the Fed's intervention in the LTCM crisis. At the very least, one hopes they can turn in a better performance than they have taking ownership of the state's medmal companies and inhibiting competition. I mentioned regulatory capture in a prior post, and that example is a doozy, where NY followed the highly successful old NJ auto model. Make everybody write the crap, hold down rates, limit competition by never letting an insurer leave and requiring companies submit their first-born to write in the state. We have a new commissioner, but this problem is orders of magnitude larger and more complex than LTCM.
At least in this case they will not be forcing the underwriters to back every bond. Bonds don't vote like drivers and patients.
UPDATE: They've hired a big gun (and former colleague of the commissioner).
For those of you who don't follow these markets, the incredible decline of priced credit quality starting last summer may be a bit of a shock. This is cliff-diving of the first order. The sharp bounce-back after the insurance department announcement is also a little startling. Whether you think the run-up or the bounce-back is exaggerated, these price swings suggest herding among the hedging and speculative buyers.
I have trouble imagining the Insurance Department effort as analogous to the Fed's intervention in the LTCM crisis. At the very least, one hopes they can turn in a better performance than they have taking ownership of the state's medmal companies and inhibiting competition. I mentioned regulatory capture in a prior post, and that example is a doozy, where NY followed the highly successful old NJ auto model. Make everybody write the crap, hold down rates, limit competition by never letting an insurer leave and requiring companies submit their first-born to write in the state. We have a new commissioner, but this problem is orders of magnitude larger and more complex than LTCM.
At least in this case they will not be forcing the underwriters to back every bond. Bonds don't vote like drivers and patients.
UPDATE: They've hired a big gun (and former colleague of the commissioner).
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