Analysts: Bond Insurer Bailout Likely to Come Too Late

Readers know that we’ve expressed doubts that a rescue plan for the struggling bond insurers will even come into being, so the idea that it would be too late is safer bet. Although it is possible the rating agencies will be pressured into holding off further on their long-overdue downgrades, they’ve been under that sort of pressure for a very long time. And unlike banks, they don’t have a powerful regulator who might make life miserable for them.

Note the lack on convergence among analyst estimates as to the level of losses continues, but the tendency towards dire forecasts seems to be rising. JP Morgan estimates the guarantors will suffer $41 billion in losses, which is more than twice the industry’s total equity. That level of impairment also means the rescue plan would be a complete loss to the backers, since even an additional $15 billion would be insufficient to cover the expected losses, let alone preserve an AAA, which requires a much greater equity cushion. Another analyst forecast losses of $65 billion, which according to their estimates, impliesa required capital infusion of $130 billion.

From Bloomberg:

Bond insurers led by MBIA Inc. and Ambac Financial Group Inc. may lose their top AAA ratings before they benefit from any rescue plan.

The bond insurance industry stands to lose $41 billion on securities linked to subprime and other mortgages, according to JPMorgan Chase & Co. analysts. Efforts by New York Insurance Superintendent Eric Dinallo, 44, for a $15 billion fund to bolster insurers’ capital are likely to be overtaken by events, independent research firm CreditSights Inc. said today.

“Given the number of competing interests and levels of commitment of participants involved, we think it is unlikely that an agreement sponsored by Dinallo could be hammered out within the appropriate timeframe,” CreditSights analysts Rob Haines, Craig Guttenplan and Joe Di Carlo in New York wrote in a report. “In the offchance that any deal could be solidified, the rating agencies are likely to have already taken action.”

The industry guarantees about $2.4 trillion of securities issued by U.S. cities and states and bonds backed by mortgages, credit cards and other assets….

Losses at MBIA may reach $8 billion and those at Ambac may climb to $11.4 billion, according to JPMorgan analysts Chris Flanagan and Kedran Garrison Panageas in New York. Such a scenario would consume 80 percent of claims-paying resources at Ambac and about 50 percent at MBIA, they wrote in a Jan. 25 research note.

Bond insurers’ total losses may be as high as $65 billion, according to Independent Strategy, a London-based financial consultancy set up in 1994 by David Roche, a former head of research at Morgan Stanley. The estimate assumes a loss rate of 18 to 22 percent on $250 billion of credit derivatives linked to U.S. property, plus $90 billion of insurance on foreign real estate.

The insurers will need about $130 billion to cover the losses and to recapitalize, and the cash will have to come from taxpayers, Independent Strategy said in a statement today.

Ratings Cut

Fitch Ratings cut the AAA ranking on the financial guarantee units of Ambac in New York and Bermuda-based Security Capital Assurance Ltd. earlier this month. The ratings company is due to rule on whether Financial Guaranty Insurance Co., the fourth- largest bond insurer, has raised enough capital to preserve its AAA rating.

“We are expecting to see a downgrade of FGIC any day now,” said CreditSights, which has about 700 clients including Wall Street’s biggest banks and brokers.

FGIC in Stamford, Connecticut may have its ratings cut by as many as four levels to A+, Michael Cox, an analyst at Royal Bank of Scotland Group Plc in London, wrote in a report published today. The insurer’s rankings may be reduced today, he wrote.

The bond insurers, which began by guaranteeing the notes sold by U.S. municipalities to fund roads and schools, are incurring losses after expanding into structured finance such as collateralized debt obligations. CDOs repackage pools of bonds, loans and credit-default swaps and slice them into separate pieces of varying risk and return.

Writedowns Triggered

Lower ratings for the insurers may cause a new round of writedowns on debt holdings at the world’s financial companies, potentially forcing banks to raise another $143 billion to bolster capital, analysts at Barclays Capital said last week.

Merrill Lynch & Co. wrote down $1.9 billion of securities and Canadian Imperial Bank of Commerce had to sell more than C$2.75 billion ($2.7 billion) in stock to cover losses after the credit rating of ACA Capital Holdings Inc.’s financial guaranty business was cut 12 levels to CCC by S&P.

Ratings cuts for other bond insurers will be “much, much smaller than those for ACA, given their stronger starting capital position,” Bank of America Corp. analysts led by Jeffrey Rosenberg wrote in a report yesterday.

Saving the bond insurers “will ultimately require a broader multi-faceted regulatory response,” CreditSights said. In the meantime, the most likely sources of cash infusions are “white knight investors” such as billionaire Wilbur Ross, who has expressed interest in buying Ambac, according to the analysts.

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  1. doc holiday

    What stands out for me in these stories, is the fact that writedowns continue to rise and future expectations for more writedowns continue to rise, and subprime loans are to be resetting as foreclosures rise and within this possible multi-trillion bombardment of systemic collusion, we continue to read about how the financial community will raise capital to bail out the thousands of failed investments related to the assumed losses of trillions of dollars.

    Massive writedowns on the left hand while the right hand is raising capital….hmmm?

    So, where exactly is that new seed money for the next casino bets coming from? That is the issue, if Im not mistaken, i.e, these failing companies need more cash right? We know there are foreign entities that are being formed to scoop up some debt, but there are limitations.

    Is it a reality that these bank wolves — that need so much capital can actually pull the wool over all the sheep heads and blend in as if they just didnt blow a few trillion?

    More vodka, let them drink until they die; thats the new American Dream!

  2. Anonymous

    Please forgive intrusion, but here is link:

    The taxes on vodka became a key element of government finances in Tsarist Russia, providing at times up to 40% of state revenue.[4] By the 1860s, due to the government policy of promoting consumption of state-manufactured vodka, it became the drink of choice for many Russians. In 1863, the government monopoly on vodka production was repealed, causing prices to plummet and making vodka available even to low-income citizens. By 1911, vodka comprised 89% of all alcohol consumed in Russia. This level has fluctuated somewhat during the 20th century, but remained quite high at all times. The most recent estimates put it at 70% (2001).

    This problem can be solved with vodka for the masses and lead to job creation act and greater freedom in pension fund obligations…win, win!

  3. Anonymous

    What always amuses me in all of these analyses is that potential losses on the municipal bond guarantees are completely being ignored. With all of the real estate problems, it seems likely to me that their municipal losses are likely to be more than zero.

    The Hube

  4. Yves Smith

    The Hube,

    I don’t have the data readily at hand, but the record on municipal bond defaults, even when the real estate industry was in trouble before (the recession of 1990-1991) is remarkably good. At most, municipalities mis a payment or two. They don’t default on principal.

    Industrial revenue bonds (when a project is sponsored by a government entity and gets the tax break but the project, not the government entity itself is responsible for payment) are a different proposition, but my impression is that there are fewer of them than there were in the 1980s.

    The other dirty secret is that the rating agencies are tougher on ratings for municipalities than corporates, despite municipalities’ good payment record. The default rate on underlying single A municipal bonds is much lower than single A corporates.

    However, you are right that the hit to home values we are seeing is unprecedented, and therefore municipalities may face greater payment stress than before.

  5. Anonymous

    Re: However, you are right that the hit to home values we are seeing is unprecedented, and therefore municipalities may face greater payment stress than before.

    Im always interested in how property taxes will impact future muni revenues/reserves?

Comments are closed.