Posted on 01/17/2008 11:01:33 PM PST by TigerLikesRooster
Bond insurers spark new credit concerns
By Aline van Duyn and Saskia Scholtes in New York and Stacy-Marie Ishmael in London
Published: January 17 2008 19:09 | Last updated:
January 17 2008 23:23
Fears that the credit crunch might be entering a traumatic new phase grew on Thursday as investors lost confidence in the insurers that guarantee payments on billions of dollars in bonds.
Shares in Ambac Financial and MBIA, the world’s biggest bond insurers, fell 52 per cent and 31 per cent, respectively, as Moody’s Investors’ Service raised the possibility that both might lose the triple-A credit rating on which they depend.
The sector was dealt another blow when Merrill Lynch said it was writing down $3.1bn in hedges with bond insurers, mostly with ACA Capital, a guarantor that has lost its investment-grade rating and needs to raise $1.7bn by on Friday to avoid insolvency.
The triple-A credit rating of the bigger bond insurers is crucial because any demotion could lead to downgrades of the $2,400bn of municipal and structured bonds they guarantee.
This could force banks to increase the amount of capital held against bonds and hedges with bond insurers – a worrying prospect at a time when lenders such as Citigroup and Merrill are scrambling to raise capital.
“Significant changes in counterparty strengths [of bond insurers] could lead to systemic issues,” said Eileen Fahey, managing director at Fitch Ratings.
The crisis of confidence in MBIA and Ambac has been building because of their exposure to securities backed by assets including subprime mortgages. Warren Buffett’s Berkshire Hathaway set up a new bond insurer last month after New York state’s insurance regulator pressed him to do so.
The pressure on the traditional bond insurers rose on Wednesday when Ambac said it planned to raise $1bn in equity. Just hours later, Moody’s said it was putting Ambac’s triple-A rating on review for a downgrade.
On Thursday, Moody’s said MBIA’s triple-A rating could also be cut, including ratings of $1bn worth of capital that it raised just last week.
Standard & Poor’s said on Thursday that losses for bond insurers could be 20 per cent higher than previous estimates, raising expectations that it, too, might consider lowering its triple-A credit ratings for Ambac and MBIA.
The fresh credit concerns pushed up the cost of buying protection against a possible default by MBIA or Ambac.
“The debt and the equity markets now both regard these companies as no longer being triple-A,” said Andrew Wessel, an analyst at JPMorgan.
“Their ability to continue to insure new bonds, which is their sole function, has effectively been diminished by the market.”
The cost of buying protection against defaults by US companies also rose. The Markit CDX North America investment grade index rose 9.5 basis points to a record 111bp, indicating increased concerns about the chances of defaults. The index gauges credit risk and has risen from under 80bp since the start of the month.
Jamie Dimon, chief executive of JPMorgan, said this week when asked about bond insurers: “What [worries me] is if one of these entities doesn’t make it . . . the secondary effect . . . I think could be pretty terrible.”
Here is what you said.
Bond insurers who can’t pay for what they insured should go to jail for insurance fraud.
They were paid their premiums, after all. In advance.
ABK and MBI have been on the theoretical list of stocks worth zero for a while for me. I cannot state that I have made that much money off this, as hedges have been proportionately expensive to such a degree it is a gut-check for opening a position (puts, in this case). Simply shorting the underlying has in some cases not been possible through the clearing firm I use.
I recall in march of last year a co-worker who trades derivatives explain why MTG and RDN (scheduled to merge at that time) were screaming shorts due to underlying subprime problems. It is easy to see a problem, much harder to pull up an option chain and decide how much to pay to bet on it. We concluded in retrospect that he was so far ahead of the curve that it would be necessary to go out 6 months minimum on any trade of this sort, but then again the mbi/abk trade we put on last month is already hitting (I closed all positions in them, cannot see how they are allowed to go bankrupt, so surely they trade halted and open at zero soon, sigh)
If one does not have a good quality product or service that operates with flat to good margin, why the heck does the idea of derivatives serve anything less than a CYA for incompetents 'managing' corporations??
I do not know the specifics of such business, but from what I have read, there's a big push now from the Feds with new laws to make corporations more transparent, which they should be for the investor, whether buying the stock or hedging in the form or derivatives.
BTW, I think derivatives are a good investment tool as a means of added protection in investment, but, market manipulations, the government and fraud can make them deadly.
Isn't it interesting that during this time, "Big Business" has become more friendly to the Democrats? It began in Silicone Valley, and moved to Wall Street.
Just pointing it out...
You’re dead on spot. Then again, Slick’s sellout of US computer and weapon’s technology to the Chicoms seems to also fall in lock-step with the corruption march too, don’t it?
How did these entities ever have a AAA rating when it appears that they cannot handle adverse financial conditions --- the very thing that an financial insurance company is supposed to be designed to handle?
What is quite amazing in the all the comments here lately, is the number of people blaming capitalists (e.g. bond insurers). If someone should go to jail, Alan Greenspan would be that person. We could also send the politicians who think that millions of pages of economic regulation is ok. People need to read Mises and read about credit expansion. Bond insurance failure is simply a result of reckless credit expansion.
Much blame lies in the same rating agencies mentioned in the article. They were the ones who scored mortgage derivative as “AAA” because house prices would only go up.
Well, a grand game of "Let's Pretend" has been going on by unspoken mutual agreement. Now some of the players don't like the game any more and are asking uncomfortable questions. And the Fed has to work overtime to prevent the public from hearing the answers. ;)
I Scream SCAM!!!
Starting with the banks, including the other lenders, followed by the so-called bond insurers, as well as the big Wall Street houses, and ending with these loony rating agencies - it’s a multi-part SCAM.
Start here: If an asset is written off, can you still own it? If the answer, straight or legally tortured, is yes, Then you can bet the banks are running a huge SCAM on America, with Wall Street being complicit.
There is something “too measured”, too methodical about the way this story is unfolding over time to be anything other than a well-planned SCAM perpetrated on the average American by certain financial elites, with government and press complicity. Something stinks, and it stinks big.
Conspiracy theory? If I start with the premise of creating a system and set of events whereby I obtain wealth by creating the illusion of present loss to mask future gain, is it then possible to model something that is consistent with that premise? Or is the notion of creating an illusory present loss for the purpose of acheiving a future gain just nonsense? You know, I have a very smart friend I can ask. Used to work to E.F. Hutton. I’ll listen.
Such a model would require a very sophisticated understanding of both risk and the psychology of fear. Someone deeply learned about the history of financial markets would be in a good position to develop such a model.
The strange part is that up until a year or so ago, the idea was that the strength of sound investments would more than offset the weaknesses of things like subprime mortgages. But there has been a “flip”. Now, the idea is that the weakness of risky investments, though they are still paying, has more than offset the strengths of the other investments - even if that view is wrong.
This is going to be an interesting discussion with my friend...
yep. the elites and the banks (and the executive and legislative branches of government they own) all walk away with real assets while main street files for bankruptcy...funny how that all worked out, eh?
“How did these entities ever have a AAA rating when it appears that they cannot handle adverse financial conditions -— the very thing that an financial insurance company is supposed to be designed to handle?”
DOn’t know but I suspect it is a top-level decision by the rating agencies not to downgrade the insurers due to fears that the (deserved) downgrade will in fact start the cascade effect everyone wants to prevent.
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