AIG Junior, Your Name is Syncora

http://www.ft.com/cms/s/0/0aeae43a-35ea-11de-a997-00144feabdc0.html

Sycora (also known as SCA) has become the first Municipal Bond Insurer to be ordered to stop paying claims. They insured $85 billion in Municipal Bonds.

The problem in the Bond Insurance Industry is that the main companies went from insuring Municipal Bonds to insuring Mortgage-Backed Securities (CMBS). They took on massive leverage (100 to 1 was normal) and got blown up when the CMBC turned out to not really be AAA, but turned out to actually be Junk.

SCA started last summer having written insurance on $56 billion worth of CMBS paper.

There is $18 billion in Credit Default Swaps (CDS) written on the bonds of SCA. Today’s event is considered a bankruptcy in the eyes of the holders of the CDS and they will expect to be paid next week on this insurance.

So SCA is a mini version of AIG. The question is - who are the banks that wrote the CDS on SCA? Remember how I mentioned that Derivative Exposure was up $20-something Trillion last quarter? The system continues to get more leveraged, not less, even as the real consequences of too much leverage play out. The one left holding the bag continues to be THE TAXPAYER, as we will end up backing any hedge fund or bank that fails as a consequence of SCA CDS.