• 05 Jun 2008 at 3:46 PM

Who Is Exposed To The Bond Insurer Downgrade?

By John Carney

The downgrade of Ambac and MBIA could result in another round of write-downs for Wall Street. Some estimates say that over-all exposure could force banks to write-down as much as $70 billion as bonds covered by insurance gets valued lower.
Citigroup, Merrill Lynch and UBS are widely thought to have the most exposure to bond insurer risk. But this has been known for months. Have they been able to hedge away this risk? As insured bonds get downgraded, institutions with risk-adjusted reserve requirements will be forced to up their cash reserves. Other institutional investors who are obliged to hold only “safe” triple A rated paper, such as some pension funds, will be forced to sell bonds no longer wrapped with triple A insurance.
But, you know, the stock market is having its best day in a month. So maybe no one cares about the bond insurers anymore.

Comments (15)

  1. 1
    Posted by guest | June 5, 2008 at 4:00 PM

    Whoever thought that only $70bn would have to be written-down pursuant this downgrade was hugely underestimating the real number … more like $500bn when you look at all the knock-ons like subordinated debt that might not get paid now that the insurer is no longer a sure thing for the senior and super-senior. Actually, now that I think about it…$500bn is probably low.

  2. 2
    Posted by guest | June 5, 2008 at 4:18 PM

    When they “double post” it means they’re anxious.

  3. 3
    Posted by guest | June 5, 2008 at 4:19 PM

    what is up with the US equities markets?
    did I miss something?

  4. 4
    Posted by guest | June 5, 2008 at 4:28 PM

    Equity traders making their money before the Belmont Stakes for the Triple Crown.

  5. 5
    Posted by guest | June 5, 2008 at 4:38 PM

    How about a DB Trifecta Pool in honor of the future triple crown winner Big Brown?
    Nevermind, the winning pick is:
    1Big Brown
    2Tale of Ekati
    3Casino Drive

  6. 6
    Posted by guest | June 5, 2008 at 4:46 PM

    @4:38 Don’t get too far ahead of yourself there Smarty Jones.

  7. 7
    Posted by guest | June 5, 2008 at 4:50 PM

    Yeah? When do the sutures come out? I’ve seen much better horses lose the crown with lesser problems coming into Belmont.

  8. 8
    Posted by guest | June 5, 2008 at 4:53 PM

    Many of the institutional investors will have it written in their guidelines that the bonds have to have been triple A at the time of purchase but do not have stipulations to the selling of these assets (as in a downgrade).

  9. 9
    Posted by guest | June 5, 2008 at 4:56 PM

    the Preakness field was a joke. injury riddled Big Brown runs the whole Belmont? i’m short this horse/.

  10. 10
    Posted by guest | June 5, 2008 at 5:03 PM

    Think anyone was stupid enough to put in a repurchase agreement based on any rating changes?

  11. 11
    Posted by guest | June 5, 2008 at 5:10 PM

    equally weak field except for the horses that ran the KY Derby and sat out the preakness.
    He has dominated with sore feet before. And most importantly, he doesn’t know how to lose.
    If not he, who?

  12. 12
    Posted by redpandot | June 5, 2008 at 5:21 PM

    @4:53 – depends. most institutional investors will have a max limit to their portfolio’s exposure to BBB bonds… depends on how full the bucket gets…

  13. 13
    Posted by John Carney | June 5, 2008 at 5:34 PM

    I’m going to be out of town this weekend, and so I’ll miss Belmont. If anyone is going and wants to write it up for DealBreaker, email me: john@dealbreaker.com.

  14. 14
    Posted by guest | June 6, 2008 at 2:17 AM

    For some comic relief goto:
    http://www.bearstearnslives.com

  15. 15
    Posted by guest | June 6, 2008 at 10:59 AM

    Are you trying to trick someone into going to Elmont?
    That’s not very nice.

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