Breaking: S&P Cuts MBIA and Ambac Ratings

Posted by John Carney, Jun 05, 2008, 2:25pm

The writing was on the wall when news broke this morning that bond insurers MBIA and Ambac were dropping their resistance to ratings downgrades from Moody's. But it was S&P that struck first, chopping the ratings on both Ambac and MBIA. S&P cut the financial strength of the operating companies and the holding companies, as well as the ratings on their debt. S&P says the bond insurers face a decline in new business and lack financial flexibility.

The downgrades further damage the business prospects of the bond insurers, who need a triple A rating to carry on their business. The downgrades should ripple through the $2.6 trillion municipal bond market. Moody's has estimated that downgrades at the bond insurers could affect as many 563,000 individual ratings on municipal issues backed by bond insurance.

Oddly the reaction to the downgrades is far less panicked than what we saw a few months ago, when even rumors of downgrades could send the major indexes into a tailspin. Presumably this is because this has been telegraphed for so long that many investors have already priced in the cut.

Moody's is expected to cut soon.

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Comments

Posted by guest, Jun 05, 2008 2:39PM

Even if true, does it matter?

Posted by guest, Jun 05, 2008 2:39PM

Even if true, does it matter?

Posted by guest, Jun 05, 2008 2:40PM

Even if true, does it matter?

Posted by guest, Jun 05, 2008 2:41PM

judging by the stock action today, yes.

Posted by guest, Jun 05, 2008 2:48PM

MBI shares up. They said they are not going to give $900 million in capital from the holding company to the insurance company to essentially prop up a dying dog.

Posted by miami, Jun 05, 2008 2:50PM

I had 2:31 in the pool, hope I won something good!

Posted by miami, Jun 05, 2008 2:50PM

I had 2:31 in the pool, hope I won something good!

Posted by Anal_yst, Jun 05, 2008 2:53PM

wait wasn't this like a life/death issue of immense importance just a few months ago?

Posted by guest, Jun 05, 2008 2:57PM

It was until people figured out munis don't need insurance.

Posted by guest, Jun 05, 2008 3:01PM

It's about time Moody's and S&P pooped or got off the pot. Well, S&P made the first dookie in the Muni Pond, now Moody's will bravely follow.

How could you trust MBIA to tell the truth about anything going forward when they held the $900 million at the holding company level despite claims it was going to be contributed to the insurance company?

Looks like Bill Ackman was right.

Posted by guest, Jun 05, 2008 3:22PM

Presumably this is because this has been telegraphed for so long that many investors have already priced in the cut.

You and your silly efficient market hypothesis.

The monolines are screwed, now when will everyone start writing down the values of the insured ABS and the CDS.

Posted by guest, Jun 05, 2008 3:25PM

its not like they were cut to junk, the mark is not very severe ... yet

Posted by guest, Jun 05, 2008 3:39PM

It's already priced into ABS too. For nearly a year wrapped deals have been trading as if they were unwrapped, so outside of Ambac and MBIA, this should be a rather small ripple highlighted by some retail selling. The other, still relatively small risk, will be accounts that have to decrease leverage in their holdings because of the rating changes on their wrapped bonds.

Posted by HAM05, Jun 05, 2008 3:42PM

actually 3:39, unwrapped deals were trading tighter than fgic wrapped bonds after fgic got downgraded. it was very, very weird.

Posted by guest, Jun 05, 2008 3:45PM

Trading like unwrapped is correct. But most wrapped ABS CDOs and similar deals don't trade that much in case no one's notcied.

However, many institutions have been marking their books internally to par minus an adjustment - which is what 3:22 is alluding to. Derivatives accounting hooray!

Posted by guest, Jun 05, 2008 4:12PM

foolish... mutual funds/pensions/endowments/trusts etc have contractual obligations to hold a certain level of quality in their portfolios. a material event like this might legally force these guys to unload all that paper. a few months ago when there was no bid for that ish it would have been a huge problem but most of that stuff has hopefully been cleared out by now.

btw circus is in town at someplace called taj... bunch of clowns

Posted by guest, Jun 05, 2008 5:16PM

It's a deer-in-headlights reaction by the market. No one wants to think about the implications.

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