Ripple Impact of $534 Billion Debt Downgrade

Bloomberg is reporting S&P Lowers or May Cut $534 Billion of Subprime Debt.

Standard & Poor's said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations, as home loan defaults rise. The downgrades may extend losses at the world's banks to more than $265 billion and have a "ripple impact" on the broader financial markets, S&P said.

The securities represent $270.1 billion, or 47 percent, of subprime mortgage bonds rated between January 2006 and June 2007, S&P said today in a statement. The New York-based ratings company also said it may cut 572 CDOs valued at $263.9 billion.

The downgrades may increase losses at European, Asian and U.S. regional banks, credit unions and the 12 Federal Home Loan Banks, S&P said. Many of those institutions haven't written down their subprime holdings to reflect their market values and these downgrades may force their hands, S&P said.

"It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity, and liquidity for the banks," S&P said. The ratings company will start reviewing its rankings for some banks, especially those that "are thinly capitalized."

Under accounting rules, many smaller banks haven't been required to write down their holdings until the credit ratings fell, enabling them to avoid the losses that have crippled Citigroup Inc., Merrill Lynch & Co. and UBS AG. The world's largest banks have reported losses exceeding $133 billion related to mortgages, CDOs and leveraged loans.

Who's Holding The Bag?

The key questions now are "Who's Holding The Bag?" and "How severe will the downgrade be?" Judging from the article it may be smaller regional banks that are hit hardest. Given that Bank Reserves Are Negative already this is going to trigger more borrowing from the Term Auction Facility or more mad scrambles to raise capital from the oil producers, China or Singapore. I expect many smaller banks to go under.

Ackman's Letter to Moody's and the S&P about Ambac (ABK) and MBIA (MBI)

On January 18th 2008 Bill Ackman wrote a letter to Moody's and the S&P regarding the monolines. Here is point #8 of Bill Ackman’s Letter to Rating Agencies Regarding Bond Insurers.

I encourage you to ask yourself the following question while looking at your image in the mirror:

Does a company deserve your highest Triple A rating whose stock price has declined 90%, has cut its dividend, is scrambling to raise capital, completed a partial financing at 14% interest (now trading at a 20% yield one week later), has incurred losses massively in excess of its promised zero-loss expectations wiping out more than half of book value, with Berkshire Hathaway as a new competitor, having lost access to its only liquidity facility, and having concealed material information from the marketplace?

Can this possibly make sense?

New Ackman Letter On Monolines

On January 30th Ackman wrote another letter regarding Bond Insurer Transparency. This one was addressed to The Honorable Eric E. Dinallo Superintendent of Insurance State of New York, The Honorable Sean Dilweg Commissioner of Insurance State of Wisconsin, and 5 directors at the Securities and Exchange Commission .

Click here to read Ackman's Letter On Bond Insurer Transparency.

Merrill Lynch Throws In The Towel On CDOs

Bloomberg is reporting Merrill Plans to Cut Back on CDOs, Structured Finance.

"Opportunities in many areas" of structured finance and so-called collateralized debt obligations "will be minimal for the foreseeable future and our activities will be reduced accordingly," New York-based Merrill said in an e-mailed statement. The firm will continue packaging corporate loans and derivatives into securities.

Merrill issued the statement after Chief Executive Officer John Thain told investors at a conference in New York earlier today that the firm planned to exit its CDO and structured credit businesses.

"We are not going to be in the CDO and structured-credit types of businesses," which generated 15 percent of the firm's fixed-income revenue, Thain said at the conference.

Anyone in the CDO or structured credit positions at Merrill Lynch has a job that is in jeopardy.

FGIC Loses AAA Rating

After missing a deadline Fitch strips FGIC of AAA rating.

Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, New York-based Fitch said today in a statement. The company had been AAA since at least 1991. Moody's Investors Service and Standard & Poor's are also reevaluating their ratings.

"This announcement is based on FGIC's not yet raising new capital, or having executed other risk mitigation measures, to meet Fitch's AAA capital guidelines within a timeframe consistent with Fitch's expectations,'' the ratings company said today.

Fitch was pretending that FGIC deserved an AAA rating for years. Now it is pretending the rating deserves to be AA.

Moody's, Fitch, and the S&P are a disgrace for the way they have pandered to the monolines.

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