bond insurance

BofA revives billionaire's bond insurer: update

April 15, 2011: 12:27 PM ET

BofA chief Brian Moynihan isn't making many people happy lately, but he made Wilbur Ross' day Friday.

Shares of Assured Guaranty (AGO), the Bermuda-based bond insurer that the billionaire vulture investor (right) bought into three years ago, surged as much as 30% after Bank of America (BAC) agreed to pay it $1.1 billion to close out policies backing 29 residential mortgage securities.

Rich get sort of richer

The deal, which eliminates any risk that Assured Guaranty will have to make up missed payments on $5 billion of mortgages, is worth a $250 million economic gain to Assured Guaranty, UBS analyst Brian Meredith estimates in a note to clients Friday.

The agreement could be worth millions as well to Ross, whose big investment in Assured Guaranty has been under water practically since it was struck in the early days of the financial crisis. He agreed Feb. 29, 2008, to buy as much as $1 billion of Assured Guaranty at around $22 a share. Update: He owns 8.7% of the stock, the company said.

After trading above that level through the summer of 2008, the stock plunged as low as $2.69 in the near collapse of the financial system, which sharply increased the prospect of defaults on the bonds the company insures. Assured Guaranty shares rose $4 to $18 and change, their highest level since January.

Rich get sort of poorer

Investors are hoping Friday's deal will pave the way for more such agreements by Assured Guaranty, which is effectively the only insurer writing policies on bonds issued byU.S. municipalities. The company had a smaller portfolio of policies backing Wall Street-originated housing finance deals than two rivals that were essentially forced out of business by their exposure to possible payouts, but the scope of potential losses at Assured Guaranty remains a concern to investors.

Trying to limit that exposure has been a top priority for CEO Dominic Frederico, by doing things like demanding that bond issuers such as BofA repurchase mortgages that weren't underwritten according to guidelines.

"The numbers that have been recognized to date are very low compared with what the ultimate liability will potentially be" for banks, Frederico told the Financial Times last year. "I think we're at the tip of the iceberg."

That iceberg has already sunk one onetime Assured Guaranty rival and severely damaged another. Ambac filed for bankruptcy last November, and the other big monoline insurer, MBIA (MBI), hasn't been writing new business since a series of downgrades during the crisis.

Even so, MBIA shares surged 20% Friday amid hopes for more bond insurance settlements -- maybe even ones that don't necessarily prop up wrong-way bets by billionaires.

Also on Fortune.com:

Follow me on Twitter @ColinCBarr.

  • RIP, muni bond insurance

    The market no longer believes in the business of insuring municipal bonds.

    Ambac has gotten more serious about its months-long threat to file for bankruptcy, today going so far as to miss an interest payment to its creditors and say in a regulatory filing that it's seeking a "restructuring of its outstanding debt through a prepackaged bankruptcy proceeding." My colleague Colin Barr has a good breakdown of the company's financial troubles MORE

    - Nov 1, 2010 2:11 PM ET
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