Bond Insurers MBIA And Ambac To Incur Predicted Subprime-Related Losses Of $11.6 Billion Each
Bond insurers MBIA and Ambac may lose $11.6 billion (each) on guarantees of mortgage-backed debt and other related securities, as predicted recently by Managing Partner of Pershing Square Capital Management LP, William Ackman, and as reported by Bloomberg.com's Christine Richard and Mark Pittman (1/30). Such losses could have far reaching effects by increasing investor losses in municipal securities and raising future borrowing costs for states and municipalities.
Using a model supplied by an unnamed bank, Ackman recently posted a list of asset-backed collateralized debt obligations and other securities guaranteed by MBIA and Ambac that allow readers to create their own loss predictions.
Ackman sent his findings to the Securities and Exchange Commission as well as the Superintendent of New York Insurance, Eric Dinallo, who is currently in talks with unnamed banks regarding raising new capital for bond insurers, stabilizing the bond insurers, and bolstering financial markets.
Analysts have tried in vain to estimate losses on collateralized debt obligations and bonds, which determine whether companies retain their top AAA rankings. The extent of losses facing the bond insurers remains undetermined in part because it is difficult to value the complexity of many debt instruments that they have insured. With $2.4 trillion of securities guaranteed, the bond insurers' potential losses could significantly impact market stability.
According to Ackman, several things cause ratings companies to underestimate potential losses of MBIA and Ambac. For example, Ackman points out that the ratings agencies are relying on after-tax results, failing to update ratings on reinsurers of bond insurance and ignoring the slide in the commercial mortgage-backed securities market, among other things.
As of January 9, MBIA had said it will likely report a $737 million expense to cover subprime mortgage-backed securities losses. On January 22, Ambac acknowledged that it expects to pay claims on CDOs of $1.1 billion. In a report by JPMorgan Chase & Co., analysts forecasted pretax losses related to residential mortgage securities of $11.4 billion for Ambac and $8 billion for MBIA while Standard and Poors said that Ambac could lose $1.9 billion after taxes and MBIA $3.2 billion.
In a statement prior to the release of his letter, Ackman said, ``Up until this point in time, the market and the regulators have had to rely on the bond insurers and the rating agencies to calculate their own losses in what we deem a self-graded exam.'' Ackman, who began questioning MBIA's AAA rating six years ago, said ``Now the market will have the opportunity to do its own analysis.''
Other observers have begun raising questions about MBIA's rating. The credit rating agencies had given MBIA an AAA rating, the same rating given to U.S. Treasury obligations. In order to attract additonal capital, however, MBIA was recently compelled to pay 14% (per annum) interest on $1 billion of surplus notes, an interest rate more akin to a high risk junk bond offering. This development confirms that the market views MBIA as much less creditworthy than the rating agencies.
The financial markets are concerned about the bond insurers' current woes, fearing that downgrades in the bond insurers' credit ratings could drag down the value of securities that they have insured, causing billions of dollars in investment losses. There is added concern that such ratings downgrades could significantly increase the cost of raising capital for both governmental agencies and corporations.
MBIA Inc. and Ambac Financial Group Inc., are two of the largest bond insurers. Security Capital, CIFG Assurance North America, FGIC Corp. and Financial Security Assurance Inc. are others.
