April 11, 2008

MBIA Loses AAA Rating From Fitch

Emma Moody of Bloomberg.com reported on April 4, 2008 that Fitch Ratings cut MBIA’s insurance rating from AAA to AA on the grounds that the bond insurer no longer had sufficient capital to retain the top rating. According to Fitch, MBIA, the world’s largest bond insurer, would need as much as $3.8 billion in additional capital to deserve an AAA rating. Fitch also cut MBIA’s long-term rating from AA to A.

MBIA had already raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus, LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months. These steps were enough to satisfy the other two credit rating organizations. Both Moody’s Investor Service and Standard & Poor’s affirmed the top rating for MBIA. Fitch, however, continued its review.

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March 14, 2008

Investors Are Being Misled About The Real Values Of Their Subprime Securities Holdings

Many investors are being provided with grossly inflated valuations of their subprime securities holdings because Standard & Poor’s and Moody’s have failed to cut the ratings of many AAA-rated securities even though those securities do not meet the criteria to be classified AAA. The bulk of these securities are believed to be held by banks and insurance companies.

A recent study by Bloomberg concluded that 80 of the AAA securities in the ABX indexes fail to meet S&P’s criteria for AAA-rated securities. The study concluded that, if the ratings standards were accurately applied, at least $120 million in AAA bonds would be downgraded. According to Credit Suisse Group, record home foreclosures have caused AAA debt to fall to 61 cents on the dollar, but those same bonds would be worth only 26 cents if downgraded to AA. If Credit Suisse is correct, investors in just these securities currently rated AAA have an undisclosed loss of at least $42 billion.

Kyle Bass, chief executive officer of Hayman Capital Partners, was blunt about the situation when he said, “The fact that they’ve kept those ratings where they are is laughable. Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.”

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February 18, 2008

Bond Insurer FGIC Downgraded Again, Seeks To Split--Litigation Likely To Follow

Moody’s Investors Service downgraded the insurance units of FGIC Corp., the fourth-largest bond insurer, six levels from Aaa to A3 and announced that further downgrades were possible. This downgrade occurred as a result of FGIC’s expansion into guaranteeing CDOs backed, in part, by subprime mortgages. FGIC, which is owned by Cypress Group, PMI Group, Inc. and Blackstone Group LP, had its rating cut eight levels to below investment grade.

As a result of Moody’s downgrade, the New York Insurance Department has reported that FGIC is seeking to be split in two to protect the municipal bonds it insures from the problems attributable to its guarantees of subprime-related securities. Essentially, FGIC is seeking to separate its “good” business (insuring municipal bonds) from its “bad” business (insuring subprime structured finance products.) FGIC reportedly insures $220 billion of municipal bonds and another $94 billion of other debt.

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January 31, 2008

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.

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January 21, 2008

Is The Market's Doomsday Scenario Here?

An old Wall Street adage says that you should never plan to bring a new offering to market right after a three-day weekend because you never know what could happen from Friday night to Tuesday morning. US markets were closed today for the Martin Luther King, Jr. holiday but it was an event-filled weekend that will cause further market turmoil on Tuesday when the markets re-open.

On December 18, 2007, The Wall Street Journal wrote “Credit Crunch Could Worsen if . . . Bond Insurers Sink, ‘Buck Breaks’.” According to Dennis K. Berman of the Journal, the two events that are of most concern to Wall Street bankers, traders, and regulators are ratings downgrades of bond insurers and money market funds losing value below $1. Unfortunately, recent events suggest that this very scenario may be playing out.

First, on Saturday, January 19, 2008, Christine Richard of Bloomberg.com reported that Fitch Ratings announced that it had downgraded the credit rating of Ambac Assurance Corporation from AAA (the highest rating available) to AA after Ambac abandoned plans to raise new equity. This in turn caused a downgrading by Fitch of approximately 140,000 municipal and non-municipal bonds insured by Ambac.

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