Ambac, MBIA Finally Get the Rating They Deserve

Every business transaction revolves around trust. You have to trust that the person or company you do business with will fulfill their part of the deal. For investors, historically our trust in a corporation's financial condition was upheld by one of three credit rating agencies: Standard and Poor's, Fitch Ratings, or Moody's. These groups issued a rating for every company out there.

The ratings ranged from the highest, "AAA," to the lowest, "C" or "D." If a company was rated "AAA," the likelihood of it defaulting on its debt was extremely low. If it was rated "C" or "D," it was considered "junk" and about to default. Things worked great with this system until February 25, 2008, when the credit rating agencies did an incredible thing: they upheld MBIA's (MBI) and Ambac Financial's (ABK) "AAA" credit ratings.

MBIA and Ambac are bond insurers. Combined they guarantee $1.2 trillion worth of corporate and municipal bonds. If one of the bonds they cover defaults, MBIA or Ambac make sure the people who bought the bond get paid. And because MBIA and Ambac were rated "AAA," they could extend this rating to the bonds they insured.

The problem was that MBIA and Ambac insured a ton of bad mortgage debt during the housing bubble. They were like butchers who packaged rotten meat as gourmet cuts. By the end of 2007, things had begun to stink so badly that the two companies were in serious trouble. Since the beginning of 2007, MBIA had lost over 80% of its market value. The company had less than $6 billion in cash and was sitting on over $17 billion in debt. It had cut its dividend and needed $2 billion in capital just to stay in business.

Yet, in spite of all these problems, the credit rating agencies stated that MBIA was a "AAA" business: as safe to buy as Warren Buffett's Berkshire Hathaway or General Electric. They were lying. Seeing this and other coverups in the financial industry, I told readers of my newsletter International Wealth Advisory to sell short financial stocks. I knew that eventually the rating agencies would have to fess up and lower MBIA's and Ambac's ratings.

They finally did. Last Friday, the credit rating agencies lowered MBIA's and Ambac's ratings to "AA." This should kick off another drop in financial stocks and the rest of the market. If it doesn't, we'll know the recent rally in financial stocks has still got room to run. If it does, we'll make a bundle.

Disclosure: Author is short financial stocks.

Comments

[BondGuy:]

Unfortunately, no one cares anymore. The FED has mooted the concept of default-- to say nothing of responsibility, prudence, and fairness.

2008 Apr 08 06:05 PM

[User 94406:]

You say the rating agencies lowered the ratings. Only Fitch did. Please get your facts straight!

2008 Apr 08 06:10 PM

[Igor The Great:]

Worthless blog by someone who can't say an ass from an elbow. Though Ackman, Tillson, and Reggie (whatever his last name) will aprove.

2008 Apr 08 06:14 PM

[Observing:]

It would seem to me that the authors last paragraph is extremely self serving! If indeed he is shorting...should he be allowed to influence the market in any way!
Are there no conflicts of interest?

2008 Apr 08 06:15 PM

[Mr Mortgage:]

You are right...it is all crooked. As housing prices continue to fall over the next couple of years, all ABP will be taken down with it. These guys do not have the money to pay even a remotely small portion of their potential liabilities. MBIA and ABK are the IMB and CFC of the insurance world. Worthless. AGO is next. How they skated through all of this is amazing.

2008 Apr 08 08:30 PM

[User 175267:]

I'm pretty sure it was only Fitch. They actually downgraded Ambak a number of months ago, and the market didn't even blink. I think the prevailing wisdom is that they're OK as long as they have 2 out of 3 AAAs.

And yes, it's all BS.

2008 Apr 08 10:38 PM

[fxtrader07:]

useless article with zero substance by a seemingly johnny-come-lately shorter of abk/mbi who probably bites his nails for a catalyst to drive the stocks down. Fitch's downgrade is meaningless and irrelevant as is Ackman's campaign by now.

2008 Apr 09 04:46 AM

[abc_member:]

Rating for this story - F. Now Mr. Summers has received the rating he deserves.

2008 Apr 09 07:51 AM

[NOYBIZNIZ:]

Another lying short. What a surprise! Get your facts straight, shortie!

Question for you, Mr. Summers: where did you get your figues of $17 Billion of debt? That's even higher than Ackman's estimated losses. Did you make that up too?

2008 Apr 09 09:30 AM

[xrjx:]

Garbage article with no substance, spurious use of 'factoids', and obviously conflicted. Graham, get a job flipping burgers--at least then you won't waste our time.

2008 Apr 09 09:44 AM

[kirkpepm:]

Your argument falls apart in the second sentence: "You have to trust that the person or company you do business with will fulfill their part of the deal." The rating agencies may have violated the trust of the relationship by rating ABS higher than deserved, or even the insurers themselves. But what does any of this have to do with MBI or ABK? They are paying on policies for defaulted bonds. Therefore they have not violated the trust with their clients. Like previous people have commented, you should have just saved us a big read and just wrote: "I'm shorting MBI"

2008 Apr 09 09:48 AM

[trotman07:]

Rookie author, get your facts straight rather than posting this to help your portfolio - in which you are clearly following Ackman in hopes of making a $

2008 Apr 09 09:56 AM

[gabe borens...:]

There are no lies involved by the rating agencies,by the way only Fitch had downgraded MBIA to AA .Not a bad rating considering that the Government of Italy has only AA/A rating.Basically the rating issues today have to do with inability of the rating agencies to quantify and define past and the current risks.I have discussed the economic and the subprime risks as early as June of 2005 with Mark Gilbert ,Bloomberg reporter(London).I have reiterated the issue of the "Subprime "risks on September 18 ,2007 during the interview with Brian Sullivan (Bloomberg TV).Back then very few had understood the monumental and sequential risks.Since then the FED'S actions ,especially the "rescue" of Bear Sterns ,potentially a global and sequential financial disaster,had convinced me that the worse is over.By accepting "subprime" collateral in order to provide the necessary liquidity,the FED had clarified the rating issues and had eliminated the potential of financial failure in any segment of the market.Clearly the MBIA and AMBAC have the necessary resources to insure any perceived risks .As the economy recovers and gains momentum in the period ahead the perceived and the real risks will diminish substantially.The financial sector is the process of consolidating for unprecedented rally.Wuthout the real stability in that sector ,global markets will be vulnearble to an unprecedented turmoil.The FED understands it (that is why it intervened to assure J.P Morgans and Bears'"Merger") and will not allow for a financial failure.One more time ,the FED has no P&L but the mandate to maintain economic and financial stability.The FED will prevail in its'objective and the shorts will mega cover innthe period ahead.Do not bet against the FED's aim of stabilizing the financial sector.WE should all understand that the debacle in that sector will cause unprecedented global turmoil-that is why the FED will prevail,it must.

2008 Apr 09 12:06 PM

[pharma:]

"The FED will prevail in its objective and the shorts will mega cover in the period ahead. Do not bet against the FED aim of stabilizing the financial sector."

Prevail by just printing money? May be the Fed will succeed by keeping big ibanks and commercial banks alive but for how long before even "government-cooked" inflation will exceed 10-20% and gas prices in the USA will go over $10-15/gallon?

2008 Apr 09 12:25 PM

[pharma:]

"The FED will prevail in its objective and the shorts will mega cover in the period ahead. Do not bet against the FED aim of stabilizing the financial sector."

Prevail by just printing money? May be the Fed will succeed by keeping big ibanks and commercial banks alive but for how long before even "government-cooked" inflation will exceed 10-20% and gas prices in the USA will go over $10-15/gallon?


Keep dreaming. There is no possibility to escape the reality and it is coming in a big way. It called a depression. Back then, from 1929 until 1931, the Fed too pushed interest rates low but commodity prices forced them to raise the rates in a big way...Then FDR started printing money but it did not help!

2008 Apr 09 12:32 PM

[Austrian Sc...:]

I like the comment that the Fed will prevail because they must. Now thats some logic there.

2008 Apr 10 12:00 AM

[Igor The Great:]

hmmm...it takes two pharmas to type one stupid message twice...don't worry about it pharma...Hussein Obama will provide for all of us...

2008 Apr 10 12:44 AM

[bren:]

Some of these so called "rating agencys" have had antitrust issues, confirmed by the Securities and Exchange Commission. We need a nonprofit agency oversee them

2008 Apr 13 01:19 PM

[triple_a:]

The article states that all 3 rating agencies upheld MBIA and AMBAC 'AAA' credit ratings. This is not correct, as Fitch downgraded both of them to a AA.

2008 Apr 29 05:05 PM