Bond Insurer Defaults - The Next Debacle?

[TJ_98370]

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NEW YORK (Fortune)(20 Dec 2007) -- Wall Street banks may inject cash into ACA Financial Guaranty Corporation, which was dramatically downgraded to junk while nearly the entire bond insurance industry was put on negative credit watch by S&P yesterday.

But don't believe for a second that the bailout team of CIBC, Merrill Lynch, and Bear Stearns believe in the company or its business model. They're just trying to avoid another round of extremely damaging write downs on top of the $76 billion in losses that securities firms and banks have posted this year.......

......The stakes are very high given that the other big bond insurers are on S&P's negative watch list and that Fitch is in the process of scrutinizing the industry and expected to downgrade. As more bond insurer ratings are cut, banks will have to write down losses on the securities they guaranteed. Bloomberg estimates that an industrywide downgrade would lead to $200 billion in losses. The two biggest guarantors alone, MBIA and Ambac Financial Group, stand behind about $652 billion and $546 billion in debt respectively that could fall in value if those companies are downgraded. S&P estimates that MBIA (MBI) faces $3.1 billion in losses on securities backed by subprime mortgages, that Ambac faces a $1.8 billion loss and Financial Guaranty Insurance Co. could take a $2.2 billion hit.

By virtue of their business model and high credit ratings (until ACA's downgrade they were all among the highest investment grade), none of these companies have the capital to cover these losses. "What's significant about ACA is that it's the first monoline to blow up. There's nothing materially different about Ambac, FGIC, MBIA or XL Capital. They all have the same problem, that they are highly leveraged, have risky exposures and inadequate reserves. It's just a question of degree," says Bill Ackman, founder Pershing Square, a hedge fund that has long been short MBIA and negative on the bond insurance industry......
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[TJ_98370]

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Morgan Staley analysts were shocked, totally SHOCKED by this development



Dec. 20 (Bloomberg) -- MBIA Inc. fell the most since 1987 in New York trading after the world's biggest bond insurer disclosed that it guarantees $8.1 billion of collateralized debt obligations that investors say have a greater chance of losses.

``We are shocked management withheld this information for as long as it did,'' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. ``MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.''

Oh-oh. Here come the lawsuits

MBIA, Ambac Financial Group Inc., and other insurers are being reviewed by credit-rating companies on concern they don't have enough capital to cover potential losses stemming from mounting downgrades of the securities they guarantee. Fitch Ratings ratcheted up the pressure on MBIA today, saying it would reassess its AAA insurance rating for a possible downgrade and gave the company four to six weeks to raise at least $1 billion.

More than $2 trillion of insured securities would lose their AAA ratings amid mass downgrades of bond guarantors. MBIA fell $7.07, or 26 percent, to $19.95 at the close of regular New York Stock Exchange trading. Ambac rose 24 cents to $27.70.

MBIA posted a document on its Web site late yesterday showing it insured $8.1 billion of so-called CDOs-squared, which repackage other CDOs and securities linked to subprime mortgages. Rising delinquencies on subprime loans contributed to downgrades on 2,007 CDOs last month alone, according to Morgan Stanley.....
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Fun new term for the day – CDO squared
A CDO collateralised by or referenced to other CDOs. Most CDO squared are synthetic CDOs referenced to a portfolio of synthetic CDOs created specifically for that purpose.
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[TJ_98370]

And from Market Ticker -



....The credit insurance problem with the monolines is totally unappreciated and is likely the 900lb gorilla that is going to smash all the china, starting in the credit markets.

It won't be for long when the swaps that they put together (many of which they were stupid enough to hold as "super senior" CDO components!) are written off as worthless.

See, what most people don't understand is that "super-senior" tranches of most of these issues aren't really debt (a bond) at all - they're effectively an insurance policy, or swap, written by these guys. In some cases they're written by banks and then laid off on these guys. When that goes "boom" its like dropping a bomb on the top of the pyramid of these structures instead of losses being taken from the "bottom up" as everyone expected......
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[Scotsman]

What I find sad, and yet fascinating, is how many people can argue that there is no bubble, there is no currency crisis, no debt, crisis, etc. and all the while, unknown to 99.9% of the population, the biggest melt-down financial markets have seen in their lifetimes is slowly but surely getting underway. The bond ratings and insurance/derivatives aspect is just one small part of a crumbling foundation that nobody seems to recognize. It's going to be a rude surprise when this whole mess goes off.

I've been reading more about Kondratieff Waves after running across them on The Market Ticker. Check it out if you haven't yet- while one can argue every era is different, the data strongly suggests we;re in for a nasty reset!

[TJ_98370]

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Scotsman -

Other than the increased cost of gas and groceries, I would agree that most people seem oblivious to recent economic developments. I try to keep informed and recently have been vacillating between numb confused indecision and stark fear. I am currently obsessing as to whether or not it would be prudent to sell all of the stock I own.

[Scotsman]

All cash here. It's a question of how much more could stocks earn in the coming year than just CD level interest if left in stocks. I think the additional upside potential is insignificant relative to the risk of losing many years of gains in a single crash event. Capital has to be preserved before it can be grown. But I'm a conservative middle-aged fart.

[TJ_98370]

[explorer]

[SeattleMoose]

[TJ_98370]

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MBIA Inc. and Ambac Financial Group Inc. tumbled in New York Stock Exchange trading after Morgan Stanley cut its estimates for the insurers' earnings and speculation grew that Countrywide Financial Corp. may file for bankruptcy.

MBIA, based in Armonk, New York, fell 21 percent and Ambac dropped 17 percent. Calabasas, California-based Countrywide declined 28 percent on concern the lender may default on its debt. Countrywide announced it had no plans to seek protection from creditors.

Morgan Stanley cut its earnings prediction for MBIA and Ambac, saying "headwinds facing guarantors appear to be worsening.'' The two largest bond insurers are facing losses from the guarantees they made on mortgage-related debt. The decline in credit quality of the debt prompted scrutiny from credit-rating companies. Fitch Ratings has given Ambac and MBIA until the end of the month to raise $1 billion each in capital.

"There's a lot of uncertainty surrounding the bond insurers,'' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management. "The largest mortgage broker in the country having liquidity issues and potential capital issues doesn't bode well for the housing market in general and for the financial guarantors in particular.'' ......

[S-Crow]

All cash as well. Worked too hard to lose principle gained over the last few years.

[perfectfire]

boom

[TJ_98370]

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A downgrade of bond insurer Ambac Financial Group Inc. is likely to have far-reaching effects, making it more difficult for cities to issue new bonds and forcing further write-downs at financial services companies, analysts said Friday.

After Ambac scrapped plans to raise $1 billion in capital, Fitch Ratings cut the company's crucial financial strength rating to "AA" from "AAA."

The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY Mellon Wealth Management. Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any downgrade could accelerate the decline.

Ambac and chief competitor MBIA together insure $700 billion in municipal bonds, and MBIA's "AAA" rating is also under threat. The company issued $1 billion in bonds this week to preserve the rating, though that may not be enough to satisfy the ratings agencies. MBIA said in a statement Friday it intends to keep working toward maintaining its "AAA" rating.......

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The growing crisis at Ambac Financial, one of the biggest bond insurers, is raising questions about Wall Street's exposure as counterparties to the bond-insurance industry coming off a period in which the big banks are reeling from more than $100 billion in write-downs of mortgage-related securities, according to Forbes.

Shares of Ambac, which has already had $8 billion wiped off its value since the start of 2007, and its rival, MBIA, both battered by losses from the collapse of the subprime mortgage market, fell sharply Thursday on concern they would lose their AAA credit ratings.

Ambac dropped 52 percent and MBIA fell 31 percent as Moody's Investors Service and Standard & Poor's increased their scrutiny of bond insurers. Credit-default swaps on both guarantors rose to records, signifying that investors see a growing chance that the companies will not be able to pay their debt.......


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[SeattleMoose]

[Nell Plotts]

Rarely do I watch Cramer but I happened to catch a snip of something on CNBC so I set my recorder to catch his program.

I think Cramer is right about the need to do a wrap around on the bond insurers. If they fail it all fails. Not just mortgages but Munis too.

I liken this to the advise given airline passengers: if the oxygen masks fall down first put your own on and THEN assist your children or the infirm. You can't help them if you are yourself unable to function.