Further Bank Writedowns: Barclays Says $143 Billion for Bond Insurance; Oliver Wyman Says $300 Billion in General

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.

From Bloomberg:

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.”

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One comment

  1. doc holiday

    This may seem OT, but this seems to be the next direction that off balance sheet entities is headed, which IMHO, is all about writing off risky investments and then taking losses which are covered up; Buffett just issued a very strange bond, and is it any wonder he is also starting up a rating agency?

    This is a long example, but these babies are unregistered and unregulated and its all about underwriting packaged loans, as in new Fannie, Freddie & Sallie junk into derivatives that are backed by Uncle Sam!

    Custodial Receipts. The Fund may invest in custodial receipts which are interests in separately traded interest and principal component parts of US government securities that are issued by banks or brokerage firms and are created by depositing US government securities into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. Custodial receipts include Treasury Receipts (“TRs”), Treasury Investment Growth Receipts (“TIGRs”), and Certificates of Accrual on

    Treasury Securities (“CATS”). TIGRs and CATS are interests in private proprietary accounts while TRs and STRIPS are interests in accounts sponsored by the US Treasury. Receipts are sold as zero coupon securities. See “Zero Coupon Securities and Deferred Interest Bonds and Deferred Interest Bonds.”
    The Fund may acquire US government securities and their unmatured interest coupons that have been separated (“stripped”) by their holder, typically a custodian bank or investment brokerage firm. Having separated the interest coupons from the underlying principal of the US government securities, the holder will resell the stripped securities in custodial receipt programs with a number of different names, including TIGRs, and CATS. The stripped coupons are sold separately from the underlying principal, which is usually sold at a deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive any rights to periodic interest (cash) payments. The underlying US Treasury bonds and notes themselves are generally held in book-entry form at a Federal Reserve Bank. Counsel to the underwriters of these certificates or other evidences of ownership of US Treasury securities have stated that, in their opinion, purchasers of the stripped securities most likely will be deemed the beneficial holders of the underlying US government securities for federal tax and securities purposes. In the case of CATS and TIGRS, the Internal Revenue Service (the “IRS”) has reached this conclusion for the purpose of applying the tax diversification requirements applicable to regulated investment companies such as the Fund. CATS and TIGRS are not considered US government securities by the staff of the Securities and Exchange Commission (“SEC”). Further, the IRS conclusion noted above is contained only in a general counsel memorandum, which is an internal document of no precedential value or binding effect, and a private letter ruling, which also may not be relied upon by the Fund. The Trust is not aware of any binding legislative, judicial or administrative authority on this issue.

    Sorry if this is too much or too OT, but Im not offended if you delete it!

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