Why did MBIA insure CDOs?
It’s ironic but CDOs were presented by the bond insurers as perfect pools of diversified risk. Many of the CDO tranches that the bond insurers backed were deemed to be “super senior” securities or safer even than AAA-rated securities. Because the risk was “nonexistent,” the premiums to underwrite the risk were tiny, and the bond insurers compensated by taking on massive exposure. In the end, these securties weren’t hugely diversified pools of debt; they were lethally concentrated bets on the housing market. Did Ackman foresee what would happen when he issued a negative report on MBIA after shorting the company? I don’t think Ackman did forsee what would happen after he issued his report questioning MBIA’s AAA rating. He seems to have believed that by making a strong case that the company was overrated, he would force investors and rating agencies to reevaluate the risk. Instead, he was investigated and labeled a fraud. Meanwhile, the bond insurance business boomed. The credit markets b
