Financial Security Assurance

The company Financial Security Assurance (FSA) is a credit enhancer (or monolines ) acquired March 4, 2000 to € 2.7 billion by the Franco-Belgian bank Dexia . It is one of the top eight US credit enhancers , the cause of the subprime crisis because they allowed the development of risky real estate debt by associating them with other receivables, to make financial investments presented as safe.

The first year after the buyout, FSA’s activity is still modest. As a result, revenues increased by 20% in the second half of 2001 to just $ 195 million. But in 2007, FSA was ranked number four in the world of credit enhancers.

According to Dexia, before guaranteeing a municipal bond, FSA requires the pledge of tax revenue or a claim on a revenue stream from essential public services. In the asset-backed securities ( ABS ) market, FSA guarantees so-called “senior” tranches that are structured to withstand significant deteriorations in the reliability of related receivables.

But in fact, the FSA group quickly had to recognize that it had also invested on mortgages, mixed with other debts, and weakening the whole.

The st July 2009, the FSA group was bought by Assured Guaranty.

Assured Guaranty changed the name of FSA to Assured Guaranty Municipal Corp. in July 2009 1 .

The difficulties related to the subprime crisis

On February 4, 2008, Dexia announces that it is investing $ 500 million in its subsidiary FSA. The bank wants to take advantage of the “growing opportunities that have recently emerged” in the field of financing communities and public infrastructure in the United States.

On June 20, 2008, American hedge fund manager Bill Ackman publicly announces he is betting on an FSA bankruptcy. Four days later, on June 24, 2008, Dexia made available to FSA a credit line of 5 billion euros, with an initial term of 5 years but renewable “as needed”.

In the first quarter of 2008, FSA posted a net loss of $ 421.6 million due to write-downs on credit default swap contracts and losses on its US mortgage bond portfolio.

At the same time, an analyst at the French investment bank Exane BNP Paribas said that having gone through the crisis without damage could be worth to FSA a comeback. In his view, by increasing its market share in the first quarter (due to the weakness of competitors who had lost their AAA rating), FSA had insured 64% of all municipal bonds sold in the United States and risked being written down due to mortgage market positions related to this increase in its market share.

On July 23, the agency Moody’s caused a decline in the Dexia share announcing consider a drop in the Aaa rating of FSA and August 7, 2008, Dexia announced that this subsidiary will leave the activity of ABS and devote its resources to services to the public sector.

Notes and references

  1. ↑ ” Bloomberg snapshot is Assured Guaranty ”  [ archive ] (accessed 19 February 2015 )

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