Moody's FINALLY questions Aaa status for Ambac and MBIA
Moody's can no longer hide... setting the stage for downgrades of Ambac and MBIA. This relates to my discussion of April 23. These rating cuts will further injure the already non-existent marketability of mortage-backed assets, and strike fear at the heart of markets for the consumer credit-backed securities, municipal bond securities, etc. Moody's is so late to the party on this one that they shouldn't even bother showing up... and their credibility for determining risk for investors is completely blown in my opinion. Every individual must therefore make their own decisions regarding risk, and I suggest a most conservative approach for the de-leveraging that's yet to come.
MBIA, Ambac Losses Elevate Aaa Concern, Moody's Says (Update2)
By Christine Richard and Jody Shenn
May 13 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said.
The first-quarter losses reported by the companies in the past two weeks elevate ``existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's, unit of Moody's Corp., said in a statement today. Armonk, New York-based MBIA and Ambac, the two largest bond insurers, tumbled in New York Stock Exchange composite trading and their credit-default swaps rose.
While New York-based Moody's stopped short of placing the companies on formal review, analyst Jack Dorer said he will examine whether the slump in mortgages is ``likely to be material for exposed financial guarantors, and will update the market as appropriate.''
MBIA and Ambac retained their top rankings from Moody's and Standard & Poor's less than three months ago. Ambac sold $1.5 billion of stock and equity units and MBIA raised $2.6 billion and the chief executive officers of both companies have said they don't need to raise more. Moody's today indicated future losses on home-equity loans, or second mortgages, may increase their need for more capital.
The slide may ``have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk,'' Dorer said in the report.
Jim McCarthy, a spokesman for MBIA, didn't immediately return a call seeking comment.
``Ambac has met the capital levels laid out by Moody's immediately prior to the capital raise,'' Vandana Sharma, a spokeswoman for Ambac said. ``We will continue to work closely with Moody's to get a better understanding of their revised analytics regarding second liens. The Aaa is extremely important to Ambac.'' Ambac generates capital internally as insurance policies mature, Sharma said.
Moody's and S&P put MBIA and Ambac on review for a possible downgrade in January before affirming them with negative outlooks. Fitch Ratings cut both companies to AA earlier this year. Fitch said MBIA needed about $3.8 billion more in capital to justify a AAA rating. S&P, a unit of New York-based McGraw- Hill Cos., yesterday said it will take no action after MBIA reported its first-quarter loss.
The prospect of a ratings downgrade by Moody's and S&P earlier this year threw a cloud over the companies and the more than $1 trillion of municipal and asset-backed debt they insure. Markets for everything from the safest municipal securities to bonds backed by home loans and auto loans seized up on concerns that their AAA backing would be removed. Banks also faced losses of $70 billion on the asset-backed debt, according to Oppenheimer & Co. analysts.
``This is an ongoing saga,'' said Andrew Harding, who helps manage $18 billion as chief investment officer for fixed income at Allegiant Asset Management in Cleveland and doesn't hold or have bets against bond-insurer debt.
MBIA, down 87 percent in the past year, dropped 61 cents, or 6.2 percent, and New York-based Ambac declined 36 cents, or 8.3 percent, to $3.97. Ambac slumped 96 percent in 12 months.
The cost to protect $10 million of debt for five years backed by MBIA's insurance unit jumped $25,000 to $775,000, according to broker Phoenix Partners Group. Credit-default swap sellers are demanding $810,000 to protect $10 million of debt guaranteed by the insurance unit at Ambac, up from $765,000, according to London-based CMA Datavision.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
MBIA, which started as the Municipal Bond Insurance Association in 1974, and the rest of the bond insurers were criticized by ratings companies, lawmakers and regulators over their decision to expand into CDOs, which package pools of debt and slice them into new pieces with varying risk. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities.
MBIA yesterday reported a $2.4 billion first-quarter loss, its third quarterly loss in a row. The company recorded $3.58 billion of charges on derivatives it uses to guarantee CDOs and other debt.
S&P yesterday said it remained ``circumspect about assigning stable outlooks to insurers'' because of ``the unprecedented level of mortgage market deterioration.''
Ambac posted a loss last month of $1.66 billion for the first quarter, also its third in a row. Ambac took $3.1 billion of charges for insurance on mortgage securities. The company set aside $1 billion during the first quarter to cover claims on second-lien mortgages. Ambac has insured bonds backed by closed- end second and home equity lines of credit of $16.4 billion, according to data on the company's Web site.
MBIA boosted forecast payouts on bonds backed by home equity loans by an additional $495 million.
MBIA had insured bonds backed by home equity lines of credit and closed-end second loans totaling $21 billion at the end of 2007, according to the company's Web site. Almost $9 billion of those securities were originated in 2007.
To contact the reporter on this story: Christine Richard in New York at email@example.com; Jody Shenn in New York at firstname.lastname@example.org.
Last Updated: May 13, 2008 16:52 EDT