Each day the mortgage crisis gets worse, a bigger problem is getting worse.

Each day the CDO / credit crisis gets worse, a bigger problem is getting worse.

At some point, we are going to have to be objective and evaluate the capital at the companies that provide financial guaranty insurance. Some people just look at companies like MBI, ABK, RDN, PMI, MTG, ACA etc. and say that the stocks have declined a lot already so that must mean the worst is priced in already. Of course, this is a ridiculous way to evaluate risk, but it’s certainly the easy way for far too many investors. Please take the time to consider each company in this space. Evaluate their capital vs. the value of the insurance they have written. If the company has capital that is a fraction of their exposure and there is a good chance that the products they have guaranteed will fail, this is more than a warning sign.

A year ago, when no one really looked at risk and exposure - these companies were humming along. Now it’s a giant circular problem. When the ratings agencies gave the financial guaranty insurers high ratings and the financial guaranty insurers provided the issuers with “protection”, it was a happy time for the money machines. Now that the underlying financial instruments have been shown for what they are, this happy circle of friends is broken. Each time a writeoff occurs, each time the borrowers struggle, each time a rating agency lowers its assessment, each time a financial guarantor is downgraded …. it is a vicious circle. So in the end, when the financial guarantor cannot deliver on its commitments I really wonder who will be making good for them. Which brings me to the heart of this post - reinsurance for financial guaranty insurance. Please give it some thought.