Bond Insurer Death Watch: Stock and CDS Markets Give Another Thumbs Down

Bloomberg reports that the stock prices of bond insurers MBIA and Ambac tanked today and the prices required for their credit default swaps soared on news that Standard & Poor’s and Moody’s were again reviewing their AAA ratings (in S&P’s case, based on new, more negative information about subprime defaults; Moody’s said in response to news of writedowns at Ambac).

The declines are dramatic: Ambac’s stock has fallen nearly 65% today from a low base; MBIA has dropped another 38%; MBIA’s credit default swaps increased over 15% today to 31.5% upfront. I’m not in that market, but I can’t recall ever seeing figures like that. Other bond insurers were hit also.

From Bloomberg:

MBIA Inc. and Ambac Financial Group Inc., battered by losses from the collapse of the subprime mortgage market, fell the most ever in New York Stock Exchange trading on concern they will lose their AAA credit ratings.

New York-based Ambac dropped as much as 65 percent and Armonk, New York-based MBIA fell 38 percent after Moody’s and S&P said late yesterday they are reviewing the rankings the companies depend on to sell bond insurance. Credit-default swaps on both guarantors rose to records, signifying investors see a growing chance that the companies won’t be able to pay their debt.

Ambac, which yesterday cut its dividend and ousted its chief executive officer after reporting greater-than-expected write downs on the bonds it insures, said Moody’s decision was “surprising.” Losing the AAA stamp would cripple the bond insurers and throw doubt on the ratings of $2.4 trillion of debt the industry guarantees, causing as much as $200 billion in losses, according to data compiled by Bloomberg.

“Issuers and investors have to prepare themselves for the possibility of a downgrade,” said Matt Fabian, an analyst with Municipal Market Advisors in Westport, Connecticut. Fabian said he still expects the companies to keep their rankings….

“Until we find firm ground, meaning a point where the market thinks it has enough information to assess the overall scope of credit market losses, and how the losses for various institutions are interlinked, we fear that uncertainty and volatility will rule the day,” UBS AG credit analyst David Havens in Stamford, Connecticut, wrote in a note to clients yesterday.

Credit-default swaps tied to MBIA’s bonds soared 15.5 percentage points to 31.5 percent upfront and 5 percent a year, according to broker Phoenix Partners Group in New York. That means it would cost $3.15 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.

The price implies that traders are pricing in a 78 percent chance that MBIA will default in the next five years, according to a JPMorgan Chase & Co. valuation model.

Contracts on Ambac, the second-biggest insurer, rose 15 percentage points to 30 percent upfront and 5 percent a year, prices from CMA Datavision in London show.

Ambac’s implied chance of default is 78 percent, according to the JPMorgan data.

The contracts trade upfront when investors see a risk of imminent default. MBIA and Ambac are trading at levels reached by Countrywide Financial Corp., the mortgage lender battered by speculation it would file for bankruptcy before agreeing last week to be bought by Bank of America Corp…..

MBIA’s subordinated notes sold last week tumbled 4 cents on the dollar today to 84.5 cents, bond traders said. The insurer raised $1 billion in the Jan. 11 offering of so-called surplus notes.

Moody’s and S&P started new reviews one month after affirming ratings on Ambac and MBIA. Both companies slashed dividends and announced plans to raise up to $2 billion to shore up capital and retain their top rankings. Losses at bond insurers have drawn questions from the U.S. Securities and Exchange Commission as well as the New York Insurance Department.

The insurers “crossed a line” by guaranteeing risky securities and may require new regulation to protect policyholders, New York’s insurance department superintendent Eric Dinallo said earlier this month.

Billionaire investor Warren Buffett is taking advantage of the bond insurers’ missteps by starting his own financial guarantor. Buffett’s Berkshire Hathaway Inc. may also invest in a bond insurer, Ajit Jain, head of Berkshire’s new business, said in an interview Jan. 9. Jain declined to comment when reached by telephone today.

Ambac’s credit rating may be cut after the company said it may write down the value of securities it guarantees by $3.5 billion, Moody’s said in a statement yesterday. The losses include a $1.1 billion for collateralized debt obligations.

“This is a significant change in Ambac’s view of the ultimate losses to be realized from these transactions,” Moody’s said. The report “significantly reduces the company’s capital cushion and heightens concern” about losses on mortgage-backed securities, Moody’s said.

S&P began a new examination of all bond insurers after increasing its predictions for losses on subprime mortgages.

S&P is now assuming losses on 2006 mortgages to people with poor credit will reach 19 percent, up from 14 percent, as housing prices decline further than it previously thought. That may make S&P more likely to downgrade the bond insurers.

Moody’s said it, too, may broaden its review to other insurers.

“The market stresses contributing to Ambac’s recent financial and organizational announcements are also evident at other financial guarantors,” Moody’s Managing Director Jack Dorer said.

Contracts on FGIC Corp., owner of the fourth-largest bond insurer, soared 7 percentage points to 31 percent upfront and 5 percent a year, CMA prices show. Credit-default swaps on XL Capital Assurance, the bond insurance unit of Security Capital Assurance Ltd., rose 6 percentage points to 33 percent upfront and 5 percent a year, according to Phoenix.

SCA fell 39 cents, or 18 percent, to $1.79 on the New York Stock Exchange. Assured Guaranty Ltd., whose ratings were affirmed last month, dropped $3.01 to $18.98.

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  1. Anonymous

    You are one of the few people that I consistently – scratch that and replace with always – agree with.
    You cherry pick the ripest stories.

  2. Anonymous

    I think the monolines are too big to be allowed fail. If Mer has exposure to the monolines of $14bn, can you imagine MEL allowing these guys to fail? More likely, the monolines will be allowed to run off these businesses. Otherwise, the state of the capital markets could be threatened beyond belief.

  3. Yves Smith

    Anon of 10:10 PM,

    There is remarkably little attention being given to this, relative to its importance.

    I hope you are right, but the problem is that this is an insurance company.

    The regulators of the parties that will be hurt, the investment banks and commercial banks, have no reach over the insurers. And the insurers are state regulated. To my knowledge, there has never been a big rescue in that industry. The one party that might step in, just because it has demonstrated a willingness to step in, the Treasury Department, has been silent on this one.

    The IBs are too impaired to go rescue the monolines. Buffet and AIG may reinsure the best pieces. How much damage that ameliorates is anyone’s guess.

  4. Yves Smith

    I neglected probably the most important point: a mere downgrade, which seems well-nigh certain unless some miracle consortium emerges, has dire consequences for the markets AND for the monolines themselves.

  5. Anonymous

    Eric Dinallo, the NY Superintendent of Insurance, who was formerly on Spitzer’s attack team when he was AG, until he went through the revolving door to work at Morgan Stanley as a compliance MD, is now trying strong arm the commercial banks to prop up the Bond Insurers??? What a farce! It will never happen and the markets will crash because of his misguided headline-grabbing antics!

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