Is Time Running Out for Bond Insurers?

CNBC
Is Time Running Out for Bond Insurers?
Friday February 22, 10:51 am ET

As troubled bond insurers like MBIA and Ambac fight to maintain their triple-A ratings, officials at these firms are pondering how their businesses might look if they do indeed get downgraded, CNBC has learned.

he decision by the big ratings agencies, Moody’s, Standard & Poor’s and Fitch is imminent, and at least one of the raters could make an announcement sometime today.Bond insurers guarantee bonds held by investors from default, agreeing to pay interest and principle if the issuer doesn’t do so. But maybe more important to investors is that insurers also lend their triple-A rating, the highest rating in the bond market, to the bonds as part of their insurance package.

People inside the New York State insurance department, which has taken the lead in trying to prop up the insurers, say both MBIA and Ambac have enough assets to cover losses stemming from their insurance of depressed collaterialized debt obligations, or CDOs, held by large banks like Citigroup.

The bigger question is whether these firms can compete with ratings less than triple-A, particularly now that the bond insurance business will be focusing on covering bonds of municipal governments. Many large investors of municipal debt can only hold securities with triple-A ratings.

In addition, a lower rated MBIA (NYSE:MBI – News) and Ambac (NYSE:ABK – News)would also have to compete against other triple-A rated insurers, like the one Warren Buffett says he’s creating.

Meanwhile, a downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.

Of course, MBIA and Ambac could still convince the rating agencies to maintain their triple-A’s, something that New York State insurance commissioner Eric Dinallo has been working on for the past month.

As reported on CNBC, Dinallo is working on separate plans with consortiums of bank that may infuse capital and provide lines of credit to sure-up the bond rating businesses at FGIC and Ambac and prevent downgrades. MBIA recently raised several billion dollars in new capital from Warburg Pincus.

But analysts are increasingly skeptical that even with the infusion of cash downgrades can be avoided because of the massive losses the insurers might take on their coverage of CDOs and other bonds that are packed with depressed subprime loans. As evidence, they point to recent management changes at MBIA and other moves; just yesterday, MBIA announced that wants to split its municipal bond business to shield it from the losses on its business of insuring CDOs. The move is being seen as a way to placate regulators and bond raters as a decision nears.

CNBC: Insurer Downgrade “Imminent”

CNBC: Insurer Downgrade “Imminent”

from Calculated Risk by CalculatedRisk

CNBC reports: Is Time Running Out for Bond Insurers?

The decision by the big ratings agencies, Moody’s, Standard & Poor’s and Fitch is imminent, and at least one of the raters could make an announcement sometime today.
…
[A] downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.
emphasis added

BofA: Monoline Split “Significant cost” to Financial Markets

BofA: Monoline Split “Significant cost” to Financial Markets

from Calculated Risk by CalculatedRisk

In the current Situation Room report (no link), BofA analysts suggest the monoline insurer breakup could lead to $30 Billion in write-downs for banks. BofA suggests further capital infusions, aimed at stabilizing the monolines at AA, would be a possible alternative.

This is the first suggestion I’ve seen of trying to stabilize the ratings at AA. I’m not sure how that would impact the muni bond market.

MBIA CEO Recommends Split

MBIA CEO Recommends Split

from Calculated Risk by CalculatedRisk

From Bloomberg: MBIA Advocates Severing Municipal, Corporate Units

MBIA Inc.’s new Chief Executive Officer Jay Brown, under pressure to come up with a plan to rescue the troubled company, said bond insurers must separate their municipal guarantees from asset-backed securities.

…Bond insurers should also stop issuing credit-default swaps, Brown said.

Moody’s Investors Service, which has AAA ratings on the insurance arms of MBIA and Ambac, has said it plans to complete a review of the ratings by the end of the month. Standard & Poor’s is also considering a downgrade of the companies’ ratings.

The three largest insurers all want to split their businesses.

From the WSJ Feb 17th: Ambac in Talks to Split Itself Up

From the WSJ Feb 15th: FGIC Will Request Break-Up

Women and children first

Women and children first

by Matt Carter

Yesterday’s post on talk that two major bond insurers may each split themselves into separate companies — one covering municipal bonds, the other riskier investments like collateralized debt obligations (CDOs) — prompted one reader to ask why that would prolong the credit crunch. A good question, since the only reason we even get into stuff like that on InmanBlog is the potential impact on mortgage lending and housing markets.

Picture these big bond insurers as the Titanic. On board as paying passengers you have local governments who need bond insurers to back the municipal bonds they issue to fund big infrastructure projects like sewers and street improvements (and maybe even services, when the going gets tough). Let’s call these passengers the women and children.

Also on board are investors who have purchased credit guarantees on CDOs, complicated investments that often contain slices of mortgage-backed securities and other debt. Losses on those CDOs have ripped a long gash in the bow of the Titanic, and unless the investors (including large banks) are willing risk even more resources to plug the leak and pump out the water that’s rushing in, the whole ship could go down. We’ll call these passengers the men (click “continue reading” for further discussion).

The owners of the Titanic — and government regulators — are getting worried that it may be impossible to save everybody. What if, in the event that things get really bad, they could put all the men in the leaky bow of the ship, and the women and children in the stern, and then split the ship in two?

The men could continue trying to repair the damage to the bow, while the women and children could continue sailing on in the undamaged stern (In other words, to step away from this slightly ridiculous analogy for a moment, local governments could continue issuing municipal bonds no matter how bad losses in CDOs get).

Just the threat of doing this could get the men working harder without even splitting the ship in half, because they have a better chance of bailing the water out if the women and children are around to help them man the pumps.

If the ship does get split in two and the bow loses headway or sinks, that’s going to have an impact on mortgage lenders ashore, because the investors aboard the Titanic include banks that were counting on bond insurers to cover some of their CDO losses.

Today, Moody’s Inevstors Service estimated that banks may have to boost their reserves by as much as $30 billion to cover additional CDO losses should things get ugly for bond insurers (see CNNMoney.com story) That’s money that won’t be available to make loans.

New York Gov. Eliot Spitzer has toned down his rhetoric about wanting to see the companies split up within days (see Reuters story), but federal lawmakers don’t want to be seen as sitting on the sidelines. The House Financial Services Committee has just announced that it will hold hearings on March 5 to see what can be done to protect the ability of cities and states to continue issuing bonds.

“Municipal bonds are among the safest—second only to US Treasuries—in terms of losses to investors, and it will be of particular concern to this committee that they not be punished by the worsening credit market and overall economic picture,” Committee Chairman Barney Frank, D-Mass. said in a statement announcing the hearing.

Given that declining home prices will put a major dent in many state and local government’s tax rolls, all the talk about protecting the “women and children” may be more than posturing.

Moody’s: Bond Insurer Downgrades May Cost Banks Billions

Moody’s: Bond Insurer Downgrades May Cost Banks Billions

from Calculated Risk by CalculatedRisk

From Dow Jones: Bond Insurer Woes May Cause $7-$10 Bln Hit For Banks: Moody’s

Downgrades of bond insurers could require banks and securities firms to increase reserves by between $7 billion and $10 billion, rating agency Moody’s Investors Service estimated on Tuesday.

If trouble in the so-called monoline business gets even worse, banks may have to set aside $20 billion to $30 billion to boost reserves covering counterparty risks, the agency added.
…
About 20 banks and securities firms have roughly $120 billion worth of hedges with financial guarantors on CDOs that contain asset-backed securities, Moody’s said on Tuesday.

“We are currently evaluating these individual exposures to assess how institutions can absorb the additional counterparty reserves that might be required if one or more financial guarantors were downgraded,” the agency said in a statement.

The headline states the obvious, but this gives an idea of the size of the problem according to Moody’s.

When Dinallo met Buffett: the monoline breakup plan

When Dinallo met Buffett: the monoline breakup plan
from: http://ftalphaville.ft.com/blog/2008/02/15/10941/when-dinallo-met-buffett-the-monoline-breakup-plan/

Bond insurer MBIA hit back on Thursday at Pershing Square’s Bill Ackman – the hedge fund manager who has made a fortune shorting the monolines. Outsiders seem to be finding value in the bond insurer business too.MBIA’s testimony to the US House capital markets subcommittee is available here. It seems that a lot has been redacted from the copy Reuters got hold of on Thursday. MBIA takes issue with a number of flaws in Ackman’s model. But it’s not a very clear-cut trouncing.

It’s slightly disingenuous too of MBIA to imply that “serious analysts” disagree with Ackman. As Yves Smith at Naked Capitalism points out:

This posture conveniently ignores that rating agency Egan Jones and several Wall Street analysts have posted even more dire loss forecasts than Ackman.

Whatever its flaws, Ackman’s model has thrown up a number of truths: lest we forget the multi-billion dollar slew of abortive recapitalization attempts?

And even while MBIA’s testimony might indicate that insolvency isn’t quite on the horizon, it doesn’t address the more pressing issue at hand: are these AAA institutions?

But forget all of that, because the ball might just well and truly be out of the monoline’s court.

NY Governor Eliot Spitzer also gave testimony to the House committee. As the FT reported Spitzer has given the bond insurance companies five days. If an in-house market-led solution isn’t sorted by then, they’ll be broken up. Insurance superintendent Eric Dinallo elucidates:

We have been actively discussing all of the options with the bond insurers and, if necessary, we will consider allowing the bond insurers to split themselves into two companies. One would have the municipal bond policies and any other healthy parts of the business. And there is no reason to believe that this cannot be a healthy business. The other would have the structured finance and problem parts of the business.

We would ensure that the funds paid by municipal governments would go to support their insurance, and not pay for the problems in structured finance. We believe that this plan could produce enough capital to preserve the ratings of and provide protection for the municipal bonds.

And who is waiting in the aisle?

It was to ensure a safety net for the municipal bonds that over the Martin Luther King Day weekend in January we asked Berkshire Hathaway to price the entire municipal bond portfolio of the three largest bond insurers. Earlier this month, Berkshire sent its proposal to the three companies. I believe that there may be other investors who would be interested in investing in the municipal side of the business.

This entry was posted by Sam Jones on Friday, February 15th, 2008 at 8:58 and is filed under Capital markets, Hedge funds, People. Tagged with Ambac, bill ackman, eliot spitzer, Eric Dinallo, FGIC, MBIA, warren buffett. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Ambac seeks $2bn rights issue: UBS and Citi to underwrite?

Ambac seeks $2bn rights issue: UBS and Citi to underwrite?
from: http://ftalphaville.ft.com/blog/2008/02/19/11014/ambac-seeks-2bn-rights-issue-ubs-and-citi-to-underwrite/

Day three (or five, counting the weekend) of Elliot Spitzer’s monoline countdown this may be, but bond insurers are still holding out for a market solution.

The WSJ now reports plans from Ambac for an emergency rights issue, offered to current shareholders, to raise $2bn. The rights issue, if it went ahead, could be underwritten by several large banks – notable among them UBS and Citi. Has talk of a split geed Wall Street into action? There’s evidently still some reluctance:

Convincing banks to commit this capital remains a hurdle, according to a person familiar with the matter

On the split, it’s worth noting that profilic monoline shorter Bill Ackman has also been quiet.

Perhaps because, as Brian Yelvington at CreditSights notes, in the event of a split, swaps used to short the bond insurers may succeed to the stronger, muni business, not the structured finance rump. Under industry guidelines, that will happen if 75 per cent or more of the monoline’s business is deemed to be in municipal insurance.

This entry was posted by Sam Jones on Tuesday, February 19th, 2008 at 8:42 and is filed under Capital markets, People. Tagged with Ambac, citi, ubs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

The End of the Monolines

The End of the Monolines

from: http://seekingalpha.com/article/65176-the-end-of-the-monolines?source=yahoo

It looks like the end of the monolines to me. FGIC has already said it’s splitting – something which, legally, is fraught at best. Ambac (ABK) is trying to raise $2 billion in new equity before, yes, splitting. And now MBIA (MBI) has announced that it’s kicked out CEO Gary Dunton, replacing him with former CEO Jay Brown. Which is likely to be about as effective as reinstating Al Lord as CEO of Sallie Mae.

MBIA’s Brown back in the saddle, no plans for breakup

Credit-Suisse’s Exposure, Martha Misses, MBI Chief Splits
from: http://blogs.barrons.com/stockstowatchtoday/2008/02/19/credit-suisses-exposure-marthas-misses-mbi-chief-splits/?mod=yahoobarrons

MBIA’s Brown back in the saddle, no plans for breakup
Troubled Bond insurer MBIA (MBI) reversed gains last Friday after the company said chief executive Gary Dunton is resigning, to be replaced by Joseph Brown, the company’s CEO from 1999 to 2004. Brown told the Wall Street Journal today (subscription required) he plans to make “significant changes” at MBIA, though apparently spinning off some parts of the business, for example separating the municipal bond unit from the subprime finance unit, is not something that’s on the table now: “Split is not a term that’s going to be used at MBIA,” he said, though he prefaced the comment by saying, “At this point, all options are open to us.” Rather, brown said there would be a review of the kinds of things MBIA insures and the amounts, as “”We were not designed or structured to be the most important company in the entire financial system,” in Brown’s words.