Doubts on $1.2 Trillion of Debt

Moody's Warnings on FGIC, MBIA Cast Doubt on $1.2 Trillion Debt.

Moody's Investors Service's warning that the top credit ratings of FGIC Corp. and three other bond insurers may be cut casts doubt on $1.2 trillion of municipal, corporate and asset-backed securities. Moody's late on Dec. 14 placed the top Aaa insurance ratings of Stamford, Connecticut-based FGIC and XL Capital Assurance Inc. in New York under review for possible downgrade. It affirmed the Aaa insurance ratings of Armonk, New York-based MBIA Inc. and CIFG Guaranty in Hamilton, Bermuda, though it said the outlooks were "negative."

If the insurers lose their Aaa ratings, so too may the securities they guarantee, forcing some holders to sell the bonds because of their investment guidelines. "Everyone understands the systemic risk if even one of these companies is downgraded," said Peter Plaut, an analyst at hedge fund manager Sanno Point Capital Management in New York.

My Comment: The systemic risk is present whether or not the bond insurers rating are cut. People keep acting as if everything is OK as long as ratings are maintained. However, this is not wish upon a star and you get your wish fantasyland. Enron's debt was rated "investment grade" by the rating agencies up to several days before it went bankrupt. The same games are being played now.

The Aaa rankings of New York-based Ambac Financial Group Inc., Hamilton-based Assured Guaranty Corp., and Financial Security Assurance Inc. of New York were affirmed. Philadelphia- based Radian Group Inc.'s insurance unit kept its Aa3 rating.

My Comment: Ambac (ABK) is soaring on the news. It was up over 26% at one point today as if this affirmation matters. It will not matter any more than the news that sent MBIA (MBI) from $30 to $38 in a day. Three days later MBIA was back below $30 and still is today. MBIA is up 4% today on the Amback news, to $ 28.80. I am not going to guess what Ambac does in the short term. I am confident they have not solved their long term problems.

MBIA, Ambac and CIFG have taken steps to shore up their finances to help avoid a downgrade that would cripple their business. The bond insurers assign their Aaa stamp to more than $2.4 trillion of debt.

My Comment: It's a mirage to think MBIA and Ambac have significantly shored up their finances. See Ambac Blows It ... Again for more details. Also note the debt total is at least $2.4 trillion, not the headline number of $1.2 trillion.

"FGIC and MBIA are two of the big four bond insurers," said Matt Fabian, a senior analyst and managing director at independent research firm Municipal Market Advisors in Concord, Massachusetts. "I don't think anyone expected a downgrade, so this is about as bad as you reasonably could have expected."

My Comment: Exactly. The debt rating agencies will not do their jobs until it is well understood by everyone what they are going to do. This is the way the broken system works.

Security Capital Assurance Ltd., the parent of XL, was given six weeks to come up with $2 billion more in capital by Fitch Ratings or face losing its AAA rating.

My Comment: Either Security Capital Assurance Ltd. is undercapitalized or not. What does 6 weeks have to do with anything?

I suspect pressure from Fitch will cause Security Capital Assurance to selloff good assets while retaining poor ones just as Ambac did. Ambac reinsured $29 billion out of $556 billion and did nothing about $29.2 billion in CDOs or $8.8 billion of securities backed by subprime mortgages.

Problems postponed are not problems solved, especially when the problems are still left on the books and likely to deteriorate further. In case you missed it please consider Fitch Discloses Its Fatally Flawed Rating Model.

No matter what games Moody's, Fitch, or the S&P play short term, the problems for the insurers are going to keep growing faster than they can raise cash by cannibalizing themselves.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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