Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

MBIA and Ambac's Capital in Doubt


When times were good guarantees were not needed. Now that times are difficult the increasing likelihood is that those guarantees are essentially worthless.

It took a while but Moody's (MCO) is finally coming to the realization that MBIA and Ambac capital is in doubt.

MBIA Inc. (MBI) had the biggest drop in more than 20 years in New York Stock Exchange trading after Moody's Investors Service said the biggest bond insurer is "somewhat likely" to face a shortage of capital that threatens its AAA credit rating.

"The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated," New York-based Moody's said. "We now consider this somewhat likely."

My Comment: "Somewhat likely" is certainly a strange way of putting it. I suspect "nearly guaranteed" is closer to the truth.

The loss of MBIA's top ranking would cast doubt over the ratings of $652 billion of state, municipal and structured finance bonds that the company guarantees. MBIA is among at least eight bond insurers seeking to ward off potential credit-rating downgrades by Moody's, Fitch Ratings and Standard & Poor's. The insurers guarantee $2.4 trillion of debt and downgrades could cause losses of $200 billion, according to Bloomberg data.

My Comment: The entire idea that junk Municipal Bonds can carry an AAA rating based on "guarantees" is now in question. The implications of an across the board downgrade of municipal bonds is very serious.

Please note California Forgoes Insurance On Municipal Bonds. If MBIA and Ambac (ABK) attempt to raise prices for guarantees, more states like California will simply refuse to pay. This makes it unlikely that insurance hikes are the way out for the insurers.

Ambac Financial Group Inc., the second-largest bond insurer, Financial Guaranty Insurance Co., the fourth-largest, and Security Capital Assurance Ltd. (SCA) are also "somewhat likely" to have a capital shortfall, Moody's said today. CIFG Guaranty, considered the most likely to fall below the benchmark, was bailed out by parents Groupe Banque Populaire and Groupe Caisse d'Epargne.

My Comment: MBIA and Ambac are not now, nor were they ever in a position to guarantee anything. When times were good guarantees were not needed. Now that times are difficult the increasing likelihood is that those guarantees are essentially worthless.

Moody's, Fitch and S&P are examining the insurers, known as 'monolines,' on concern that a slide in the credit quality of some of the 80,000 securities they guarantee requires them to hold more capital to justify their AAA ratings. The insurers wrote contracts on almost $100 billion of collateralized debt obligations backed by subprime-mortgage securities as of June 30, according to Fitch. Those CDOs, which are created by packaging debt or derivatives into new securities with varying ratings, tumbled in value as defaults on subprime mortgages soared.

My Comment: Given that "prime" E*Trade (ETFC) debt went at 26 cents on the dollar (See E*Trade Marked To Reality - What Happens If Citigroup Is? for more on E*Trade), the odds of those subprime loans being worth even as much as 40 cents on the dollar is questionable. But let's be blazing optimists and suggest those CDOs are worth 80 cents on the dollar.

Even with a recovery rate of 80%, Ambac's and MBIA's ability to survive such a hit is uncertain. See Will Ambac and MBIA Survive? for further discussion of Ambac and MBIA's working capital.

"MBIA had excess capital of about $1.2 billion over what Moody's requires as of Sept. 30, according to company documents."

My Comment: I would like to see how they are valuing those CDOs. I suspect they are marked to fantasy. The more one looks at this, the more one comes to the realization that those AAA ratings of MBIA and Ambac by Moody's, Fitch, and the S&P are a extremely suspect.

"MBIA and Ambac executives last week said they are considering new financing to defend their ratings."

My Comment: Who would want to finance either MBIA or Ambac at anything other than onerous terms as long as they are sitting on tens of billions of junk CDOs? This is yet another major Zugzwang.

Raising capital is not impossible as E*Trade, Citigroup (C), and Countrywide (CFC) have all shown. However, raising capital at good terms will be extremely difficult as long as those companies sit on massive amounts of CDOs market to fantasy rather than to reality. However, if those CDOs are marked to reality instead of fantasy, the capital required to bail out the companies will soar. There do not seem to be winning moves here for either company.

MBIA and Ambac are both in extremely weak positions, somewhat like E*Trade in my estimation. The difference in this case is the potential for a cascade even if something happens to the insurers. Is this the problem LIBOR is sensing, or is this just one of the many problems LIBOR is sensing? For more on this topic, please see Minyan Mailbag: LIBOR, What's The Big Deal?

< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos