Bad credit-related news continues, and if the Dow is any measure, the stock market response is subdued.
Barclays estimates that the losses that banks would take due to bond insurer credit rating downgrades and the impact on the instruments they insured would be $143 billion if they are downgraded to single A (I find that remarkably precise). A downgrade to AA has a mere $22 billion impact.
Given that Egan Jones has downgraded MBIA to B= and the bond and credit default swaps markets price the bond insurers at distressed credit levels, this estimate may prove to be light.
Needless to say, findings like this increase the pressure on regulators and banks themselves to orchestrate a rescue.
Banks that raised $72 billion to shore up capital depleted by subprime-related losses may require another $143 billion should credit rating firms downgrade bond insurers, according to analysts at Barclays Capital.
Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Assurance Corp. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Barclays’ estimates are based on banks holding as much as 75 percent of the $820 billion of structured securities guaranteed by bond insurers.
“This is a huge amount, but the assumptions we use are also very aggressive,” Fenner-Leitao in London said in a telephone interview. The estimate shows how bank capital could be diminished in the event of significant downgrades, he said….
Fitch is likely to cut the rankings of other bond insurers in the “very near term,” with Financial Guaranty Insurance Co. at greatest risk, Fenner-Leitao wrote in the report. New York- based FGIC insures $315 billion of bonds.
Standard & Poor’s cut New York-based ACA Capital Holdings Inc.’s rating by 12 levels to CCC last month, causing Merrill Lynch & Co. to write down $1.9 billion of securities and Canadian Imperial Bank of Commerce to sell more than C$2.75 billion ($2.7 billion) in stock to cover writedowns.
Consulting firm Oliver Wyman, which specializes in financial services, issued a press release on a report, “State of the Financial Services Industry” which foresees another $300 billion in subprime-related losses to the banking industry (hat tip Boom2Bust). Note that this computation does not appear to consider the impact of bond insurer downgrades; ie, it looks at subprime-related losses and carries them through to bank balance sheets. From the Telegraph:
“While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting.”
Tumbling property prices – especially in the UK and Spain – a weakening dollar, a possible collapse in commodity prices, and a fall in Chinese and Indian stocks will “disrupt” the global economy, the report claimed.
Banks are already coming off one of the worst trading periods in memory, with shares across the industry plummeting 40pc in the past six months.
Oliver Wyman has estimated that financial services companies have already taken a $300bn hit on their sub-prime exposure.
It estimates that $1,300bn worth of sub-prime mortgages were written in total.
US banks will feel the pinch in particular, Oliver Wyman predicts. “North American financial services firms will have a tough year,” it said. “Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves.”