The Two Forgotten News Stories That Would Ultimately Doom Goldman Sachs
http://online.barrons.com/article/SB...k=wsj_redirect
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DESPITE A GLOSSY ROSTER OF OWNERS LIKE Bear Stearns Merchant Bank and New York investment company Third Avenue Trust, ACA Capital (ACA) has flown under Wall Street's radar for most of its 10-year history.
And perhaps that has been a good thing, given ACA's rather picaresque history. The firm's founder, H. Russell Fraser, often arrived at the New York headquarters in full Marlboro Man western regalia -- until he was sent packing to his ranch in Wyoming in 2001 as a result of lousy numbers in ACA's original business of insuring low-rated municipal-bond issues. Then in 2004, ACA suffered the indignity of having its stock's initial public offering aborted shortly before launch when its primary underwriter, JPMorgan, took a walk. It seems that, late in the process, Morgan became concerned about some personal-tax issues of Fraser's successor, who has since departed.
With new management in place, ACA was finally able to get its IPO off last fall. But investor disinterest forced the company to cut both the size and the projected offering price. ACA was able to raise just a paltry $79 million.
Yet ACA's days of relative anonymity are fast coming to an end. For in recent weeks, the insurer has been drawn into middle of the mushrooming subprime-mortgage crisis, by virtue of having quietly over the past two years insured $15.7 billion of predominantly subprime securities. And the bulk of these guarantees ($9.3 billion worth) have been placed on some of the most speculative paper in this free-wheeling market -- so-called mezzanine, subprime collateralized debt obligations, or CDOs.
http://online.barrons.com/article/SB...935796340.html
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Such a reduction would be catastrophic for ACA. Any rating below single-A-minus would force the insurer to post margin of $1.7 billion or more on its $25 billion book of subprime collateralized mortgage obligations, to reflect the mark-to-market losses that it has already acknowledged on this portfolio.
In the third quarter, ACA took a pre-tax write-down of $1.7 billion, $1.5 billion of which stemmed from the decreased value of its subprime guaranteed portfolio. That helped push the company's financial results, as reported under generally accepted accounting principles, to a loss of $1 billion, and its GAAP net worth to minus $888 million.
