Insurance is a Debacle!!Fitch was the first to downgrade ACA and they were 100% right. Then ACA fired them. Now Fitch going to downgrade MBIA. the otheres are in cohoots. Rating agencies should be indited like Arthur Anderson. no way MBIA's debt is AAA. The market for its debt already telling us it isn't. No way AAA? Same quality as GE? Forget it!!! Its a scam of stupid proportions. BSC?....insurance no good. $46B of real exposure. BSC is technically insolvent!!!!
No Safety Net In the Subprime Debacle,
Now Bankers Find Bond Insurance May Not Be There
By SERENA NG and GREGORY ZUCKERMAN
December 21, 2007
Banks and investors face a dilemma: Some firms on the other side of trades in the beleaguered credit markets might not be able to make good on their commitments.
Bankers call this counterparty risk. Nowhere is it more apparent than in the bond-insurance business, where units of firms like MBIA Inc. and ACA Capital Holdings Inc. have guaranteed payments on billions of dollars of mortgage debt to large banks, brokers and investors around the world.
Some bond insurers are now looking unsteady, leaving the banks doing business with them potentially on the hook for losses that they previously expected to avoid.
Fitch Ratings yesterday placed the AAA rating on MBIA's insurance business on review for a downgrade shortly after the company disclosed deeper exposure to mortgage-related securities known as collateralized debt obligations than many investors thought. MBIA said it had written insurance on $30.6 billion in CDOs, including $8.1 billion of deals that were backed by other CDOs. This latter variation of CDOs is expected to be especially hard hit by defaults.
As has often been the case, Fitch took a more bearish view on MBIA than did Standard & Poor's and Moody's Investors Service, which just days ago had affirmed their top ratings on the company. Investors pushed MBIA's shares down 26% to $19.95, wiping nearly $888 million off the company's market value, and sent the cost of insurance on MBIA's own debt soaring.
Fitch was the first to spot problems at ACA; in 2004 it downgraded its A rating to BBB and withdrew the rating later that year following a request by the company.
At the center of the concerns surrounding the bond insurers are instruments known as credit default swaps, which are private contracts that act as a form of protection against losses on debt securities. The bond insurers entered into these swaps with many U.S. and European banks and brokers to guarantee the interest and principal payments on CDOs if they were to be hit by defaults.
Fitch said it may downgrade MBIA by one notch to AA+ if the insurer doesn't raise $1 billion in capital, excluding the $1 billion cash infusion it has lined up from private-equity fund Warburg Pincus.
Even if MBIA is downgraded, it won't be hurt as badly as ACA Financial Guaranty Corp., which on Wednesday saw its A credit rating slashed to CCC by S&P, placing it at risk of default on billions of dollars of guarantees.
ACA is an especially stark example of the perils of counterparty risk. Earlier this year, as the subprime-mortgage debt market was melting down, some Wall Street banks rushed to offload the risk of the troubled assets they held. Few were willing to take on that risk. ACA did, writing nearly $20 billion of credit protection between April and September, according to its financial statements. Now that it has been downgraded, ACA may not be able to raise the capital to make good on those commitments.
Yesterday, Crédit Agricole SA joined Canadian Imperial Bank of Commerce in warning that it could take further write-downs of its holdings of CDOs in light of ACA's problems and credit-rating adjustments for other bond insurers.
ACA is scrambling to work out a solution with its 30 counterparties , who have temporarily waived their rights to demand that the insurer to come up with roughly $1.7 billion in collateral to support its guarantees. It has a capital cushion of just $650 million. Its parent, ACA Capital, was delisted from the New York Stock Exchange this month after its market value fell below the exchange's minimum $75 million threshold. The shares now trade on the over-the-counter bulletin board.
A company spokesman said ACA so far hasn't had to make any payouts on the CDOs it insured, and those bonds are still rated AAA by S&P.
As the bond insurers' problems mount, more investors are focusing on the risk at banks and brokers themselves, which in turn entered into credit default swaps with hedge funds and other investors. A bond-insurer insolvency that triggers losses at financial institutions could set off a chain reaction affecting many investors.
In recent weeks, counterparty fears have spread to other parts of the market. Some hedge funds that were using credit default swaps to bet on a further downturn in mortgage market say they have exited from some of their positions, in part because of concerns that the financial institutions on the other side of their trades are relying on the bond insurers and may not be able to pay up on the trades.
"Depending on who you wrote the contract with and what side of the trade you're on, the risk of the other entity becoming insolvent may be something to worry about," says Gregg Berman, co-head of the risk management unit of RiskMetrics Group.
Analysts say some bond insurers re-insured each other to try to hedge their own risks. This makes it all the harder to decipher where risk lies, and who ultimately is on the hook.