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.
Posted by guest, Jun 05, 2008 4:00PM
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.