Expect to see more suits and bigger failures

Implications: The article raises valid concerns on security of these insured transactions. Expect: 1. More suits as the insurers try legal tactics to invalidate coverage. 2. That the contracts and premiums have been paid and the courts will likely take a dim view of legal ploys to invalidate coverage based on semantics. 3. That the additional capital that has been raised by the monolines is still not sufficient to cover all of their risk.

Analysis: The article did a great job of high lighting the issues and concerns that will continue to play out as the mortgage mess continues to go south. If you believe that the bottom has not been reached and that there will be more defaults then the validity of the insurance coverage is the next area to review.

In this case the legal play to invalidate coverage by claiming that another insurer is covering higher rated traunche's ( who isinsurer in control) is just that, a ploy to avoid a claim. It was known when the coverage was taken out that XL Capital was not the sole insurance provider and which traunches it was covering. The acceptance of the fees and premiums on an ongoing basis is an acceptance of that contract.

The courts will take a dim view of an insurer trying to weasel out and leave the ultimate investors (small towns in Norway and the Midwest) with larger losses because of semantics. If XL is successfull in the suits then plan on merrill being the next to fall when the rest of the investors who bought insured loan traunches sue for misrepresentation.

There has been talk in the last few weeks that Companies like MGIC and MBIA have raised extra capital to the tune of $15B each. As the article points out, Merrill with a $26B exposure is just one of many investment groups that insured loans. The math does not indicate that the additional capital is enough.  There are still several hundred billion in CDO's and direct investment losses to be taken.