From the NYT:
When ACA’s debt went from A to CCC, the move also hit Canadian bank CIBC (which Fortune predicted in November). CIBC said it may immediately write down $1.7 billion of the $3.5 billion in mortgage holdings guaranteed by ACA, which were part of CIBC’s roughly $10 billion in hedged collateralized debt obligations…
If ACA Capital (ACAH) defaults on its contracts, Freeman said Merrill Lynch could immediately take a $3 billion loss…
Bloomberg estimates that an industrywide downgrade would lead to $200 billion in 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
This translates to bad news for Municipal Bonds:
About half of all bonds issued by cities, states, counties and other municipal districts are insured by a handful of companies.
These companies also started insuring securities backed by subprime loans and other assets. As the outlook for those securities darkens, investors and rating agencies are starting to question whether the insurance companies have enough capital needed to make good on their bond guarantees. And that is starting to affect the price of insured municipal bonds.
From the AP:
Dozens of municipal bonds issued by California cities and public development agencies were downgraded on Wednesday after a credit rating agency slashed its rating for the bonds’ insurer…
Five of the agency’s 59 municipal bonds were insured by ACA, including a $44.2 million bond for a public parking project, which now has a “junk” investment rating.
Say hello to tender option bonds:
Tender option bonds, companies set up by banks and hedge funds that issue short-term debt to buy higher-yielding municipal notes, manage about $200 billion of assets, the New York-based research firm said in a report. TOBs rely on bond insurers for the highest AAA ratings to get cheaper financing from money market investors…
“TOBs may have lost money but the U.S. munis they own have an undeniable clearing price not terribly worse than current levels,” Fabian said in an e-mail. “SIVs are invested in assets that have depreciated to maybe 30 cents on the dollar, have no secondary market, and are liable to see massive downgrades below investment grade.”
From MarketWatch:
Moody’s put the triple-A ratings of Financial Guaranty Insurance Co. (FGIC) and XL Capital Assurance, a unit of Security Capital, on review for possible downgrade late Friday after re-evaluating the companies’ exposure to potential subprime mortgage losses. By issuing warnings on FGIC and XL Capital Assurance, the agency is also putting more than 90,000 securities that the companies had guaranteed on review for a possible downgrade, according to global fixed-income analysts at UBS.
The majority of those securities — 89,709 — are in the public finance sector, the analysts said, noting that this was “unprecedented” in the municipal bond market.
Hans Bader says the rating agencies are complicit. Where have I heard that before?:
Moody’s and Standard & Poor’s, which give municipal bonds a higher credit rating if they have an insurer, no matter how worthless or unnecessary such “insurance” may be. The ratings agencies give the financially shaky “insurers” the highest possible credit rating of AAA, higher than the financially healthy municipalities they “insure.” It’s as silly as expecting Bill Gates to get his company’s bonds insured by a used-car dealer.
Roubini agrees and then some:
As long as monoliners were only in the muni bonds insurance business one could have made the argument that a prudent monoliner did deserve an AAA rating; but now that monoliners have vastly expanded in the ABS world of insuring toxic RMBSs, CDO, CDOs of CDOs and in some cases even holding these assets on their portfolios such an AAA rating does not make any sense.
Some people never learn:
John Aiken, a Dundee Securities analyst, said in a research note the bank is putting on “a brave face” with regard to how the bank’s balance sheet will be affected by the writedowns, which, he said, will “more likely be upwards of US$2.4-billion” rather than the US$2-billion the bank has suggested.
“Although [the impact on capital ratios] is not critical (yet), and not as bad as the levels subsequent to the Enron charge [of US$2.4-billion in 2005], CIBC is still at risk, if additional writedowns are necessary related to some of its other counterparty risks in its subprime exposures,” Mr. Aiken said.
And down the drain they go:
Barclays (BCS) shares slid 3.3% to $39.90 and UBS dropped 2.5% to end at $ 45.48.
Other banking shares followed suit. Credit Suisse Group (CS) lost 1% to $ 58.17, Lloyds TSB (LYG) finished 2% lower at $36.99, and Royal Bank of Scotland (RBS) fell 1.8% to $8.64.
You can call it The Perfect Storm or The Doomsday Scenario. Either way, we’re in free fall. And the Dow plods along, completely unconcerned. Get liquid.
Recent Comments