Matterhorn Asset Management

Credit Insurers
by Egon von Greyerz
It is Friday before Christmas and most people have already started the holiday celebrations. We normally don’t send out frequent reports especially not in Late December but the dominos are falling so rapidly that we feel obliged to avert investors.
The bond insurers are now officially in trouble. ACA Capital has lost $ 1.1. billion in the recent quarter and has only $ 1.1 billion in cash for future claims. There are more losses in the pipeline. ACA has now lost its AAA rating and been downgraded to CCC (a twelve rating downgrade). Due to the rating downgrade they now need $ 1.7 billion in new capital
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BANK SOLVENCY
The ECB adds $ 500 billion, the Fed adds slightly less. Morgan Stanley writes off $ 9 billion and is saved by a capital injection from China. This is in addition to all the write offs of major banks totalling $ 80-90 billion so far. But remember this is only the tip of the iceberg. Write offs are likely to be at least $ 400-500 billion. And this is before any major problems have emerged in the derivative area. With $ 600 trillion of derivatives outstanding and with virtually no reserves against these derivatives (everybody assumes that they are covered by a counterparty). Just a ½% loss would absorb
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