Alessandro Della Bella/AP

Bond Insurers’ Ratings Tumble Leaves Banks on Edge

June 13, 2008 11:37 AM
by Anne Szustek
Ambac and MBIA’s downgrades from an AAA credit rating put UBS, Merrill Lynch and Citigroup on shakier footing, leaving them prone to more write-downs.

30-Second Summary

Standard & Poor’s lowered the two bond insurers’ credit rating to double-A status on June 5. Moody’s is expected to follow suit, and it may cut MBIA all the way down to single-A. Fitch had already downgraded MBIA and Ambac’s ratings two weeks earlier.

The news has sent major banks scrambling to gear up for another wave of write-downs. Citigroup, UBS and Merrill Lynch have all announced billions of dollars in write-downs since the start of the year.

A credit downgrade of bond insurers, who often back consumer investment bonds, means another deficit to be accounted for on banks’ balance sheets.

When a bond insurer’s credit rating drops, it is deemed a riskier investment—and its interest rate rises accordingly. The banks must then pay more in fees to their insurers, making the bond worth slightly less than par value.

An unnamed Wall Street executive said that Moody’s was to quick to downgrade MBIA and Ambac: “They and other credit rating agencies have been under pressure to anticipate development, rather than lag behind the curve.”

But CNBC’s Charlie Gasparino argued on a June 5 telecast that S&P was slow to downgrade MBIA and Ambac. He contended that when Fitch lowered the insurers’ credit ratings, “Ambac and MBIA needed a recapitalization; otherwise they would lose their AAA ratings. Their bonds were trading at junk bond levels.”

Bond insurers provide diversification for banks’ collateralized debt obligations, or CDOs, many of which have taken a hit during the sub-prime mortgage crisis. Gasparino suggested that it may behoove insurers to keep their CDO accounting books separate from those for municipal bonds.

Headline Link: ‘Banks Face $10 Billion Monolines Charges’

Video: ‘S&P Cuts MBIA, Ambac Ratings’

Background: Recent major write-downs

Reference: Write-downs and corporate bonds


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