ACA Capital Holdings, Inc., corporate parent of ACA Financial Guaranty, reported a large loss of $1.0 billion for the third quarter on secondary market woes that have bitten every financial guarantor with exposure to the mortgage industry. ACA said the net loss was driven by $1.7 billion in pre-tax mark-to-market activity on the company’s structured credit holdings. From the press statement:

Alan S. Roseman, ACA Capital’s President and Chief Executive Officer, said “ACA returned to profitability on a net economic basis in the third quarter. The extremely large net unrealized mark on our Structured Credit portfolio and the resulting volatility in our GAAP reported results detract from ACA’s positive economic performance and the underlying financial strength of our insurance subsidiary, ACA Financial Guaranty. Given that our Structured Credit transactions were underwritten with significant cushions above the initial “AAAâ€? rating and even when taking into account the recent extensive ratings downgrades on mortgage backed securities, we remain comfortable with our risk portfolio and we believe we have adequate capital to maintain our “Aâ€? rating, which was confirmed by Standard and Poor’s in its October 29, 2007 Industry Report Card. With our rating so confirmed, we are not exposed to liquidity calls based on the mark-to-market positions of our Structured Credit exposures. Further, ACA’s net unrealized mark is based entirely on dealer quotes and/or modeled using full quoted market spreads on the underlying assets, which we believe reflects market consensus fair value.â€?

Time will tell on the marks made and their associated value, but the company instead clearly wanted to draw attention in its press statement to its own definition of “net economic income,” which (surprise!) excluded any income losses from its investment instruments, including derivatives and other investments as well as non-recourse CDOs. Also not surprisingly, the company’s measure of “net economic income” netted out a positive $5.0 million in the third quarter versus $14.8 million in the year-ago period. For more information, visit

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