MBIA: Fallout From Loss of Fitch AAA Rating

Here we go. It is amazing that the investment banks have rallied, particularly considering that most of them rely heavily on MBIA (MBI) and Ambac (ABK) as counterparties. Here is nearly all of the MBIA holdings of Morgan Stanley (MS) (many billions of dollars worth) recently downgraded . A comprehensive forensic deep dive, economic analysis and update of Morgan Stanely will be following shortly. Stay tuned...

• Fitch Ratings cut MBIA Inc.'s insurance rating to AA from AAA: Bond insurer short of $3.8bn capital to warrant the top ranking. Outlook negative.
• BIS: Monoliners have written roughly $450bn of super-senior protection on CDOs in the form of CDS contracts. About $125bn of these reference ABS CDOs. Counterparties to these trades are large banks, securities firms or off-balance sheet vehicles like ABCP conduits/SIVs.
• Fitch: As of July 2007: Industry gross insured portfolio = $2.5trillion; industry shareholder equity = $24.5bn (=leverage ratio of 100x)
• The industry guarantees $1.2trillion municipal bonds and around $800-900bn in structured finance products. CDS portfolio is $463bn (net seller). $287bn (or 61%) of CDS written on corporate bonds; 14% on RMBs.S&P: Banks hedge about $125bn of CDOs with monoliners (senior, super-senior tranches)
• FT Alphaville: Fitch downgrades SCA monoline bond guarantor rating from AAA to junk--> needs around $5bn to regain AAA rating. FGIC downgraded again also by S&P--> April 3: FGIC given 30 days by regulator to raise new capital to avoid worst-case scenario.
• Tett: Some Federal Home Loan Bank [FHLB] member banks want to offer their AAA rating to municipal infrastructure projects. However, FHLB role is already being expanded for mortgage purchases and their capital is stretched already.
• Fahey/Scott: Exposures to financial guarantors arise from:
  - CDS counterparty exposure associated with CDO, CMBS, RMBS, other ABS and corporate bond hedges;
  - Trading inventories of equity or debt of guarantors;
  - 'Wrapped' securities held in trading or investment portfolios;
  - Muni bonds wrapped in association with Tender Option Bonds [TOB] and Variable Rate Demand Obligations [VRDO] programs [i.e. off-balance sheet entitites with liquidity backstop lines]
  - Loss protection for conduits;
  - Potential support for money funds containing enhanced securities.
• Davies: Additional risk: unwinding of negative basis trades: difference between higher bond yield and lower cost to insure (with monoliners) that same bond (usually due to oversupply of CDS)--> buying both gives positive and risk-free return usually above Treasuries.
• Oppenheimer: Banks may write down $70bn if major monolines lose AAA
• Egan Jones: Bond Insurers Need $200 Billion to Retain AAA

For anybody who is interested, I am making available info on several other institutions with downgraded MBIA insured inventory. This is no trivial occurrence, and in my opinion it was long overdue (for those of you who don't remember, reference my Super Scary Halloween Tale of 104 Basis Points). Below are the results of my proprietary research on broker/bank direct Ambac and MBIA counterparty exposure. This is the link to Fitch's analysis of the same (requires free registration).

• 1st Franklin ABS Inventory
• BAC ABS Inventory
• C ABS Inventory
• CFC ABS Inventory (these guys were just downgraded themselves, hat tip to Paul)
• CTX ABS Inventory
• LEH ABS Inventory
• ML ABS Inventory
• Wachovia ABS Inventory
• WaMu ABS Inventory
• Wells Fargo ABS Inventory

Comments

[fxtrader07]

a rather weak attempt even though i agree with the basic conclusion of the author that huge writedowns are still ahead for the big investment banks and bear stearns may not be the last one that has to be put directly on life-support by the fed. however, as long as moody's and s&p do not downgrade mbi and abk, fitch's action is almost irrelevant.

[wooden]

Hello anybody home. Remember MBI refuses to subscribe to Fitch and will not release required confidental data to Fitch in order to make an intelligent rating review. Fitch should remove their rating entirely for lack of information.

[robster]

you think fitch doesn't know? fitch knows!

[drmalaka]

This market is just buying the banks time, trying to get them out of the insolvency they are now in. If they can lie about the assets on their books for long enough then their normal business activities will continue bringing in revenues and shore up their balance sheets over time.

Every quarter we will see the banks writing off this garbage against their profits instead of writing off the garbage now and taking a hit to their capital base.

These ratings are just another part of the scam being perpetrated on us by the government and bankers. Ignore the ratings agency that downgrades us as long as we have two more ratings agencies that we have bribed giving us good news.

For how long will people keep believing companies that are confirmed liars and have done their job so poorly?

Wooden, that comment is absurd. So if out of three companies that cover you one says you are in trouble the way to make your company better is not to fix your problems but rather fire the company that is not suscribing to the party line.

[deefree]

Last 2 Fed Reserve CMBS for Treasuries indicate rising demand to dump paper for cash--at higher interest rates

Release Date: April 8, 2008
For release at 10:00 a.m. EDT

On April 7, 2008, the Federal Reserve conducted an auction of $50 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.820 percent

Total propositions submitted: $91.569 billion
Total propositions accepted: $50.000 billion
Bid/cover ratio: 1.83

Number of bidders: 79

Bids at the stop-out rate were prorated at 67.70% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on April 10, 2008, and will mature on May 8, 2008. The stop-out rate shown above will apply to all awarded loans.

Release Date: March 25, 2008
For release at 10:00 a.m. EDT

On March 24, 2008, the Federal Reserve conducted an auction of $50 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.615 percent

Total propositions submitted: $88.869 billion
Total propositions accepted: $50.000 billion
Bid/cover ratio: 1.78

Number of bidders: 88

Bids at the stop-out rate were prorated at 98.87% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on March 27, 2008, and will mature on April 24, 2008. The stop-out rate shown above will apply to all awarded loans.