Insurer-Cut 'Hurricane' Hits

Having just talked about hurricanesin Many Hurricanes, Many Eyes, this headline caught my eye: U.S. Muni Yields Soar as Insurer-Cut 'Hurricane' Hits.

Yields on floating-rate, tax-exempt debt insured by MBIA Inc. and Ambac Financial Corp. soared as high as 9 percent last week as investors dumped the securities after the companies' credit ratings were cut by Moody's Investors Service on June 19. The spiraling debt costs are reminiscent of those that followed the collapse of the auction-rate securities market in February.

"You survived the big waves, then the next thing you know, you've got the hurricane coming," said Brian Mayhew, chief financial officer of the Bay Area Toll Authority, which saw costs jump as high as 7 percent on $1.8 billion of bonds backed by Ambac even before the downgrades. "This is clearly the storm. This is what we thought would never ever happen."

More Than Meets The Eye

There is more to this hurricane than meets the eye. In this case I mean the eyes of Brian Mayhew at the toll authority. Rising yields are just one aspect of the storm. There are many others. Consider things from the point of view of Ambac (ABK) and MBIA (MBI).

Bloomberg is reporting MBIA Debt Rating Cuts Prompt $7.4 Billion of Payment.

MBIA Inc.'s credit rating downgrade by Moody's Investors Service is likely to trigger $7.4 billion of payments and collateral postings.

"MBIA is leveraged through their own rating and that can make a downgrade very harsh," said Matt Fabian, a senior analyst with Municipal Market Advisors. "It's very hard for an outsider to piece together the impact of these downgrades.

In its report downgrading the debt, Moody's said MBIA faced payments and collateral calls triggered by the reduction. MBIA this month decided against giving $900 million to its insurance unit. While that contributed to the downgrade of the subsidiary, the money now puts the parent company in a stronger position, Moody's said last week.

Nonsense By Moody's

The statement by Moody's that the parent company is stronger because it is not funding its insurance unit is ridiculous. A piece of a company cannot go bankrupt.

$125 Billion At Risk

Reuters is reporting Bond insurers want $125 bln of cover wiped out.

Bond insurers such as Ambac Financial Group (ABK), MBIA Inc (MBI) and FGIC are talking to banks about wiping out $125 billion of insurance on risky debt securities to limit the damage to the insurers from the credit crisis, the Financial Times reported on its website on Sunday.

Discussions about "commuting" these insurance contracts, which were sold by the bond insurers to banks in the form of credit default swaps [CDS], have taken on a renewed sense of urgency amid a rash of rating downgrades in the bond insurance sector, the report said.

The talks centre on CDS contracts issued by bond insurers to guarantee payments on collateralised debt obligations [CDOs], complex debt securities often backed by mortgages that have plunged in value amid a wave of foreclosures, the FT said.

Other Aspects Of The Hurricane

Those are just some aspects of the monoline disaster. One must also consider potential risk of a cascade of derivative defaults, the amount of capital Citigroup, Merrill Lynch, etc, will have to raise in response, further dilution in shareholder equity, and more unwillingness to lend by banks and brokerages. There is far more to the monoline hurricane than first meets the eye.

Comments

[Ishortyou]

In respect to AMBAC and MBIA, they need to keep and save all the cash possible including stop paying dividends, deleverage from all their risky liabilities specially those CDS, CDO's, RMBS-ABS of uncertain value, in order to remediate their book values, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations and dissipate doubts.

They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.

[fatcat]

Ishort,you are living in a dream world...

[jimmy46]

""A piece of a company cannot go bankrupt.""

You reveal your ignorance.

[crashof2008]

Enter your comment hereSome of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.