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Here we have 2 companies in a rapidly shrinking industry whose clients have very little faith in their product, and who are saddled with massive liabilities that have generated record losses for 3 consecutive quarters in a row. They have been forced to discountine their highest margin (or so they thought) line of business and have lost over 70% of thier market share in their core business. Ther market has been invaded by larger companies who are better capitalized, better managed, and have none of the toxic waste liabilities that are dragging these two companies down. They both have lost over 80% of their share value in the last year, and are in the mid to high single digits, down from the 80's in '07. They have been forced to the captial market at levels of dilution and interest rates that are not even reserved for those companies that are rated the deepest of junk. They have lost more money for their investors (and now potentially their clients) than any industry since the dot.com bust. Their credit spreads have widened by multiples over the last year. Yet they have been, and continue to be rated AAA. The term "Travesty" is an understatement when describing what used to be the world's most respected financial center.


From Bloomberg: 

 

MBIA, Ambac Losses Elevate Aaa Concern, Moody's Says

 

MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said. This a joke. I saw this coming last year, and with the extent of the housing bubble and the rate of deterioration at that point, I had absolutely no doubt this was going to happen. Take your pick of the myriad ways in which I articulated it:

  1. A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
  2. Tie-in to the Halloween Story
  3. Welcome to the World of Dr. FrankenFinance!
  4. Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billi
  5. Follow up to the Ambac Analysis
  6. Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibili
  7. More tidbits on the monolines
  8. What does Brittany Spears, Snow White and MBIA have in Common?
  9. Moody's Affirms Ratings of Ambac and MBIA & Loses any CredibiltyThey May Have Had Left
  10. My Analyst's Comments on MBIA/Ambac/Moody's Post
  11. As was warned in this blog, the S&P downgrade of a monoline insurer reverbrated losses through c

 

The first-quarter losses reported by the companies in the past two weeks elevate ``existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's, unit of Moody's Corp., said in a statement today. Really!!!!??? I don't feel that a company that is rated AAA should be able to generate such concerns. If you are having such concerns now, why wasn't the company downgraded before now? The moniker "AAA" should be beyond reproach, and definitely should not be subject to the ruminations of which you just espoused! These are the characteristics of a BBB company, or mabye a CCC company. Most assuredely, you would not subject your clients to the volatility of opinion that would arise by telling them that a "Moody's rated AAA" company is even remotely at risk of not being able to pay its bills, would you??? Armonk, New York-based MBIA and Ambac, the two largest bond insurers, tumbled in New York Stock Exchange composite trading and their credit-default swaps rose.

While New York-based Moody's stopped short of placing the companies on formal review, analyst Jack Dorer said he will examine whether the slump in mortgages is ``likely to be material for exposed financial guarantors, and will update the market as appropriate.''

MBIA and Ambac retained their top rankings from Moody's and Standard & Poor's less than three months ago. Ambac sold $1.5 billion of stock and equity units and MBIA raised $2.6 billion and the chief executive officers of both companies have said they don't need to raise more. Moody's today indicated future losses on home-equity loans, or second mortgages, may increase their need for more capital.

The slide may ``have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk,'' Dorer said in the report.

Fitch Cuts

Jim McCarthy, a spokesman for MBIA, didn't immediately return a call seeking comment.

``Ambac has met the capital levels laid out by Moody's immediately prior to the capital raise,'' Vandana Sharma, a spokeswoman for Ambac said. ``We will continue to work closely with Moody's to get a better understanding of their revised analytics regarding second liens. The Aaa is extremely important to Ambac.'' Obviously so. They sold the soul of every equity investor they had to the dilution devil to maintain something they really don't deserve and probably would not be able to keep anyway.  Ambac generates capital internally as insurance policies mature, Sharma said. Really, I thought the liabilities expire and frees up the capital unearned capital, which is not the same as generating capital. Then again, what the hell do I know... It's such a complex business, and therein lies the crux of the problem...  

Moody's and S&P put MBIA and Ambac on review for a possible downgrade in January before affirming them with negative outlooks. Fitch Ratings cut both companies to AA earlier this year. Fitch said MBIA needed about $3.8 billion more in capital to justify a AAA rating. S&P, a unit of New York-based McGraw- Hill Cos., yesterday said it will take no action after MBIA reported its first-quarter loss.

`Ongoing Saga'

The prospect of a ratings downgrade by Moody's and S&P earlier this year threw a cloud over the companies and the more than $1 trillion of municipal and asset-backed debt they insure. Markets for everything from the safest municipal securities to bonds backed by home loans and auto loans seized up on concerns that their AAA backing would be removed. Banks also faced losses of $70 billion on the asset-backed debt, according to Oppenheimer & Co. analysts.

``This is an ongoing saga,'' said Andrew Harding, who helps manage $18 billion as chief investment officer for fixed income at Allegiant Asset Management in Cleveland and doesn't hold or have bets against bond-insurer debt.

MBIA, down 87 percent in the past year, dropped 61 cents, or 6.2 percent, and New York-based Ambac declined 36 cents, or 8.3 percent, to $3.97. Ambac slumped 96 percent in 12 months.

 

Credit-Default Swaps

The cost to protect $10 million of debt for five years backed by MBIA's insurance unit jumped $25,000 to $775,000, according to broker Phoenix Partners Group. Credit-default swap sellers are demanding $810,000 to protect $10 million of debt guaranteed by the insurance unit at Ambac, up from $765,000, according to London-based CMA Datavision.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

MBIA, which started as the Municipal Bond Insurance Association in 1974, and the rest of the bond insurers were criticized by ratings companies, lawmakers and regulators over their decision to expand into CDOs, which package pools of debt and slice them into new pieces with varying risk. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities.

Losses Grow

MBIA yesterday reported a $2.4 billion first-quarter loss, its third quarterly loss in a row. The company recorded $3.58 billion of charges on derivatives it uses to guarantee CDOs and other debt.

S&P yesterday said it remained ``circumspect about assigning stable outlooks to insurers'' because of ``the unprecedented level of mortgage market deterioration.''

Ambac posted a loss last month of $1.66 billion for the first quarter, also its third in a row. Ambac took $3.1 billion of charges for insurance on mortgage securities. The company set aside $1 billion during the first quarter to cover claims on second-lien mortgages. Ambac has insured bonds backed by closed- end second and home equity lines of credit of $16.4 billion, according to data on the company's Web site.

MBIA boosted forecast payouts on bonds backed by home equity loans by an additional $495 million.

MBIA had insured bonds backed by home equity lines of credit and closed-end second loans totaling $21 billion at the end of 2007, according to the company's Web site. Almost $9 billion of those securities were originated in 2007.