Just plain UGLY - how can this play out without a depression
Global Credit Market Dislocation Watch:
January 31 - Bloomberg (Jody Shenn and David Mildenberg): "Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor's."
January 30 - Bloomberg (Jody Shenn): "Standard & Poor's said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations as default rates rise. The downgrades may extend losses at the world's banks to more than $265 billion, S&P said. The securities represent $270.1 billion, or 47%, of mortgage bonds rated between January 2006 and June 2007... The...company also said it may cut 572 CDOs valued at $263.9 billion."
January 31 - Bloomberg (Christine Richard): "MBIA Inc....posted its biggest-ever quarterly loss and may raise more capital after a slump in the value of subprime-mortgage securities. The fourth-quarter net loss was $2.3 billion, or $18.61 a share, raising concern that the...company will lose its top credit rating."
February 1 - Bloomberg (Mark Pittman): "Moody's... may downgrade some bond insurers in the next few weeks as it reassesses the extent of losses from subprime mortgage securities. The industry review will be completed by late February and ratings may be cut on some companies earlier if they can't raise capital... 'Our estimate of capital needed to support the mortgage-related risk of some guarantors has risen significantly,' Moody's analysts led by Stanislas Rouyer said..."
January 29 - Bloomberg (Jody Shenn): "The market for U.S. collateralized debt obligations remained shut for a fourth week, according to JPMorgan Chase & Co., on concern that ratings companies haven't adequately assessed the securities. Demand for debt created by slicing pools of assets into securities stalled as some top-rated classes of mortgage-linked CDOs lost all their value amid surging U.S. foreclosures and as bondholders faced unprecedented downgrades on home-loan bonds."
January 31 - Financial Times (Michael Mackenzie): "The US high-yield debt market remains effectively closed for business, with the amount of money borrowed by companies in January the lowest for that month since 1990... The moribund high-yield activity comes at a time when Wall Street has still not placed some $250bn in bank loans and high-yield bonds. An inability to borrow fresh money can lead to liquidity problems for highly indebted companies, and ultimately to higher levels of corporate defaults."
February 1 - Bloomberg (Jeremy R. Cooke): "U.S. state and local governments sold about $17 billion of tax-exempt bonds in January, the least since September 2001, as bond insurers' weakening credit and rising debt costs damped municipal borrowing."
January 30 - Bloomberg (Yalman Onaran and Bradley Keoun): "Merrill Lynch & Co., the world's largest brokerage, plans to exit the business of underwriting collateralized debt obligations and other structured credit products after the securities led to a record loss. 'We are not going to be in the CDO and structured-credit types of businesses,' new Chief Executive Officer John Thain said... The market for CDOs, which repackage assets into new securities with varying degrees of risk, has been frozen since last July when two Bear Stearns Cos. funds that invested in them collapsed."
January 30 - Bloomberg (Christine Richard): "Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital... The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company's ability to generate new business."
January 28 - Bloomberg (John Glover): "A default by bond insurers such as ACA Capital Holdings Inc. may trigger a 'disaster' in the credit-default swaps market, according to Bank of America... ACA Capital, which guarantees more than $75 billion of debt, may face delinquency proceedings from Maryland Insurance Administration because it can't pay $60 billion of credit-default swaps. The contracts, based on bonds and loans, are used to speculate on a company's ability to repay debt and the buyergets face value in exchange for the underlying securities or the cash equivalent should a borrower default. 'We see huge potential problems for settling CDS contracts,' ...analyst Glen Taksler wrote...
January 30 - Bloomberg (Adam Haigh and Eric Martin): "Citigroup Inc., Merrill Lynch Co., UBS AG and other banks may be forced to post up to $70 billion in writedowns should bond insurers lose their top credit ratings, according to Oppenheimer & Co. analyst Meredith Whitney... 'The fate of the monoline insurers is of paramount importance to financial stocks,' said New York-based Whitney. 'When it becomes clear, as we expect it will, that more charges are on the horizon, we believe the market will take another turn for the worse.'"
January 30 - Bloomberg (Warren Giles): "UBS AG, Europe's largest bank by assets, reported a record loss after about $14 billion of writedowns on assets infected by subprime mortgages in the U.S."
January 30 - Bloomberg (Neil Unmack): "Morgan Stanley, the second-biggest U.S. securities firm, wrote down $169 million after helping its money funds by taking on bonds issued by structured investment vehicles. Morgan Stanley bought $1.06 billion of SIV bonds... Banks and money managers bailed out money funds that bought debt from SIVs after losses caused by the collapse of the U.S. subprime mortgage market threatened to push their value below 100 cents on the dollar, known as 'breaking the buck.'"
January 29 - Bloomberg (Mark Pittman): "A collateralized debt obligation backed by subprime mortgages collapsed after a forced sale of assets didn't yield enough to pay back $282 million in notes. Standard & Poor's lowered the rating of Visage CDO II Ltd. notes to D, its lowest rating and signifying a default. Two of the issues totaling $160 million were given an AAA rating a year ago."
Just a few months ago, bond insurers blended into the background of Wall Street. Now, as the credit crisis plays out, MBIA (MBI), Ambac (ABK), and others that guaranteed subprime bonds are at the center of the drama. Vultures and hedge funds are circling their shares. Credit rating agencies are contemplating downgrades. And New York State Insurance Superintendent Eric R. Dinallo is feverishly searching for deep-pocketed investors to fund a bailout, making it seem as if the health of the U.S. financial system depends on it.
The fears, though, may be overblown. Certainly, if an insurer loses its vaunted AAA rating there will be fallout. The industry guarantees $800 billion in asset-backed securities, such as those troublesome collateralized debt obligations (CDOs), and more importantly, $1.5 trillion in municipal debt. But Wall Street has already taken billions in writedowns on risky subprime securities that insurers agreed to cover in the case of default. And given all the problems, insurers won't cover those fancy finance products anymore. Meanwhile, the muni markets, which state and local governments depend on to fund new roads and schools, are more resilient than regulators believe.
Plenty to Fill the Void In fact, insurance on municipal bonds didn't exist before the mid-1970s. And the concept only caught fire after the 1994 bankruptcy filing of Orange County, Calif. Ever since, bond insurance has largely been used by local governments to put nervous investors at ease about the risk of defaults. By buying such protection, state and local governments, in effect, piggyback on the top-level ratings of bond insurers and thereby raise their own grades. For example, with insurance, tiny Chemung County in upstate New York can boost its normally low investment-grade rating to AAA—attracting big investors and lowering the interest rate it pays.
But critics, including some government officials, say a big chunk of muni bonds don't need coverage. Most large cities and states already have top grades from the rating agencies. Some 84% of the muni-bond insurance MBIA sold was purchased by cities with either an A or AA rating. And the risk of default by a municipality is minuscule. Even battered Orange County paid back its debts. So bond insurers, which collect some $2.3 billion a year in premiums from munis, have rarely shelled out a claim payment. "It's something of an artificial construct that so many munis have to be insured," says Frank Hoadley, Wisconsin's director of capital finance. "By and large, the decision is made by the investor." Adds Matt Fabian, managing director of research firm Municipal Market Advisors: "It's not about credit quality. It's just a bureaucratic cost municipal issuers have to pay."
If dominant players such as MBIA and Ambac are permanently sidelined by the credit turbulence, there seem to be plenty of others ready to fill the void for places like Chemung County. Warren E. Buffett, for one, decided to start his own muni bond insurance operation. And Dexia, a European bank, is pumping $500 million of new capital into its bond insurer, Financial Security Assurance, which has emerged relatively unscathed from the mortgage mess. That fresh backing has allowed FSA to capitalize on the problems of its peers. On Jan. 24, Chemung County tapped FSA to guarantee a $3.9 million offering after its previous insurer, Financial Guaranty Insurance (FGIC), was downgraded to AA. Since the summer, FSA has doubled its share of muni bond insurance, to 50%.
There's no doubt the fragility of the insurers has caused some disruptions. In January, muni bond issuance fell 48% from a year ago, to $16 billion, the worst month since September, 2001. Only about a third of the bonds had insurance, vs. the usual 50%. Prices for some municipal bonds remain unstable because the guarantees are in question. That dislocation has also helped roil the market for so-called auction-rate securities used by local governments and others to raise $250 billion in short-term financing.
Little Bailout Support New York's Dinallo, a former prosecutor and architect of the 2003 Wall Street research settlement, will have to move fast to save the biggest insurers. The credit ratings of several, including FGIC and ACA Financial Services, have already been slashed. And on Jan. 18, Fitch Ratings downgraded Ambac to AA. Analysts says it's only a matter of time before Moody's Investors Service (MCO) and Standard & Poor's (MHP) lower the grades of Ambac and MBIA, which plans to raise $750 million to protect its rating. If the two are downgraded, the game is pretty much over for them, since munis are only interested in buying AAA protection. "Once a firm is downgraded to AA, it's hard for them to do any more muni business," says Fabian.
So far, though, New York's insurance chief is having a tough time finding support for a bailout of companies that, in part, got themselves into this mess by branching out into risky securities they had no experience insuring. Investments banks would seem to be natural backers of a rescue. If the ratings on insurers drop, guarantees on another chunk of risky debt could disappear, forcing more write-offs. Last month, Merrill Lynch (MER) took a $2.6 billion hit from exposure to CDOs after the ratings on ACA and others slumped.
But banks have been preemptively slashing the values on their subprime-linked securities, figuring many of those guarantees won't materialize. And unless the ratings of Ambac and MBIA fall several notches to junk status, the additional losses for big banks would total between $30 billion and $40 billion. It's not an insignificant sum. But it's still far less than the $100 billion in writedowns Wall Street has already taken. As a result, many banks may be calculating that any losses they suffer could be less than the tens of billions Dinallo is demanding to prop up Ambac and MBIA.
Investors, then, may have to brace for more pain, though it's not likely to be crippling. "A bailout is not going to happen," says Robert B. Lamb, a professor at New York University's Stern School of Business. "The downgrades are inevitable, and investors will have to take losses."
MBIA to urge curtailing short sellers Wed Feb 13, 2008 1:59pm EST
NEW YORK (Reuters) - MBIA Inc (MBI.N: Quote, Profile, Research) plans to urge lawmakers and regulators to curtail what the bond insurer calls "the unscrupulous and dangerous market manipulation activities of short sellers," according to a copy of written testimony obtained by Reuters.
In the testimony, prepared for a February 14 hearing before the subcommittee of the U.S. House Committee on Financial Services, MBIA says the practice and dissemination of "half-truths and misleading information" should be "investigated and curtailed."
MBIA's testimony says the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises should work with the Securities and Exchange Commission.
The testimony specifically mentions Bill Ackman, founder of hedge fund Pershing Square Capital Management, which has been vocal about its short position in the bond insurers.
"MBIA notes that Mr. William Ackman is appearing on the hearing on February 14th as an 'industry expert.' Mr. Ackman is in fact not involved in the industry in any capacity except as that of a short-seller, and, accordingly, MBIA questions the characterization of Mr. Ackman's expertise," the testimony says.
An appendix to the testimony has a timeline of statements and actions by Ackman and other short sellers regarding the company going back to May 2007.
(Reporting by Dan Wilchins, editing by Leslie Gevirtz and John Wallace)
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