Ooof, things have gone from bad to ugly. Bloomberg reports that the stocks of mortgage insurers MBIA and Ambac plummeted due to an earnings estimate cut by Morgan Stanley and talk of a Countrywide bankruptcy.
It goes without saying that these developments imperil the fundraisings the insurers have been told by the ratings agencies they need to execute to fend off a downgrade. And as has been discussed widely, the implications of a ratings cut are serious, since it would lead to a wave of forced selling of certain types of insured debt.
Sovereign wealth fund to the rescue? But if they were really savvy, they’d let the train wreck happen and pick among the pieces afterward.
MBIA Inc. and Ambac Financial Group Inc. tumbled in New York Stock Exchange trading after Morgan Stanley cut its estimates for the insurers’ earnings and speculation grew that Countrywide Financial Corp. may file for bankruptcy.
MBIA, based in Armonk, New York, fell as much as 21 percent and Ambac dropped as much as 22 percent. Calabasas, California- based Countrywide declined as much as 34 percent on concern the lender may default on its debt. Countrywide pared losses after announcing it had no plans to seek protection from creditors.
Morgan Stanley cut its earnings prediction for MBIA and Ambac, saying “headwinds facing guarantors appear to be worsening.” The two largest bond insurers are facing losses from the guarantees they made on mortgage-related debt. The decline in credit quality of the debt prompted scrutiny from credit-rating companies. Fitch Ratings has given Ambac and MBIA until the end of the month to raise $1 billion each in capital.
“There’s a lot of uncertainty surrounding the bond insurers,” said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management. “The largest mortgage broker in the country having liquidity issues and potential capital issues doesn’t bode well for the housing market in general and for the financial guarantors in particular.”
Ambac insured more than $20 billion of securities backed by Countrywide originated subprime mortgages and home-equity loans as of Sept. 30, according to Ambac’s Web site. Countrywide services 22 percent of the $4.7 billion of direct subprime mortgage deals backed by MBIA, according to the insurer’s Web site.
Liz James, a spokeswoman for MBIA, and Peter Poillon, a spokesman for New York-based Ambac, didn’t immediately return calls seeking comment.
Ambac fell $3.74 to $19.74 at 3:22 p.m. after earlier falling as low as $18.37. MBIA dropped $3.23 to $14.39. Both have declined more than 75 percent over the past year.
About 30 percent of municipalities issuing debt in December bought bond insurance, compared with a historical average closer to 50 percent, Morgan Stanley analyst Ken Zerbe said in a report released today.
It “likely reflects concerns regarding the long-term financial stability of the guaranty industry,” Zerbe wrote.
Ambac on Dec. 13 took out insurance on $29 billion in securities it guarantees, transferring the risk to Assured Guaranty Ltd. MBIA last month said it will receive $1 billion from private equity firm Warburg Pincus LLC.