Early Estimates of Losses From MBIA, Ambac Downgrade

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An institutional investor passed along these initial estimates of the damage that the Street will take from the downgrade of MBIA and Ambac, Bear in mind that these presumably do not become operative until Moody’s joins S&P in deeming both concerns’ insurance subs to be AA.

These loss forecasts are only those to banks and brokerage firms, and exclude any impact on smaller financial institutions or investors such as pension funds holding paper guaranteed by the two monolines:

I received a note today putting exposure within the banks at $600 billion. Barclay’s is estimating losses of $143 billion on a markdown—I think Moody’s has to follow suit for it to kick in at that level—UBS puts it at $203 billion, and Oppenheimer says Citi, Merrill, and UBS will write down somewhere between $40 and 70 billion among the three of them—a wide spread, I agree.

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  1. Anonymous

    I doubt the writedowns are large from the banks. The FED however, may have to write down a lot. Wait, is the FED subject to GAAP? Probably not.

  2. Anonymous

    that begs the question what happens when the collateral pledged at the fed gets returned to the original owner after the swap period is over. thoughts, anyone?

  3. Richard Kline

    Sooo $140-200B downdraft? The Fed has double that in head room, sez they, “What, us worry?? We’ve got yer backstop.” Let’s get ON with this, methinks: let the chips follow the dips. . . . Look, this isn’t gonna be pretty, but it’s seldom you can solve a problme without admitting that you have one.

  4. Anonymous

    Hey Naked,

    Thanks for being so timely. I have been wondering about this ever since I read the news.

    Do you think that the collateral is going back to the original owner anytime soon?

  5. Cahagnes

    @Anonymous: assets posted as collateral remain on the balance sheets of the borrowing banks, so any writedowns will hurt them (and not the Fed).

  6. Anonymous

    Doesn’t the Fed require collateral to be AAA? I don’t know what proportion of securities pledged to the Fed rely on insurance/guarantees by MBIA and Ambac for their triple A rating, but presumbly any that does will now have to be replaced or the loan repaid?

  7. Yves Smith

    I am not certain of the mechanics, but these facilities are fairly short term, although the assumption is that many (most?) banks simply roll the loan. Thus the Fed might demand substitution when the loan matured (14 to 28 days max depending on the facility). Anyone who knows better is encouraged to speak up.

  8. Ian

    is there a situation in which pension funds and institutions like endowments would have to sell en masse the bonds which have now dropped to less than AAA? If so, I wonder if that is being factored in to loss projections.

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