ACA : CNBC Commentary Factually Incorrect
ACA Capital today responded to CNBC’s short commentary about the Company that was aired after the market close on Tuesday, November 20, 2007.
CNBC’s discussion of ACA Capital’s CDO exposures was factually incorrect in several important respects. ACA Capital’s $25 billion of exposure to CDOs referenced by CNBC were all underwritten by the Company with significant cushions above the initial “AAA” rating rather than “A” as reported by CNBC. Further, it is not correct that many of these insured risks are now lower in credit quality than “A” as reported. Rather, they remain overwhelmingly at the “AAA” level and the Company continues to view the likelihood of loss payments in the near term as highly remote.
November 21st, 2007 at 6:14 pm
Ohy, yeah, there is a huge distinction between a ‘AAA’ rating and an ‘A’ rating from the likes of S&P and Moodys. Was it in the Middle Ages there were debates about angels could dance on the head of a pin.
November 22nd, 2007 at 7:21 am
I wish i could post the cumulative table of probability of default and believe me there is a huge difference between AAA and A, particularly short term, we are talking order of magnitude.
However the difference does vanish over the long run.
November 22nd, 2007 at 4:46 pm
I have seen such tables but those apply to ratings on companies issuing debt. The ratings on CDOs and companies such as ACA and SIVs are nothing more than a ratings agency estimate of the not just default rates but recovery values and most importantly the correlation between different assets. As any trader will tell you that correlation works until it doesn’t.
November 23rd, 2007 at 3:12 am
Agree.
This paper is quite good:
Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions Mason/Rosner