Bloomberg is reporting MBIA, Ambac Downgrades May Cost Market $200 Billion

The AAA ratings of MBIA Inc., Ambac Financial Group Inc. and their five smaller competitors are being reviewed by Moody’s Investors Service and Fitch Ratings. Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.

“We shudder to think of the ramifications,” said Greg Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest U.S. securities firm by market value. “You have politicians, taxpayers, municipalities, states. It just opens up a Pandora’s box. That is a huge destabilizing force.”

My comment: The huge destabilizing factor comes from pretending the guarantee of MBIA and Ambac is actually worth anything. Their guarantee lets all kinds of garbage masquerade as AAA. What people should be shuddering over is how long this scam has continued and the idea that it should continue further.

Lower Ratings

Lower ratings would force some investors to sell securities. About 110 municipal bond mutual funds are required to hold most of their assets in AAA debt, according to data compiled by Bloomberg.

My comment: Moody’s, Fitch, and the S&P; all know this. This is why Fitch is admitting that it is making rating decisions not on merit alone, but on perceived implications of what a rating change might do to the company being rated. See Any Credibility Left At Fitch? and More Thoughts On Fitch for how rigged the game is. If the big 3 rating companies downgrade any of these companies, then things are worse than they even look. And they look awful.

When backing debt, the financial guarantors, also known as monolines, agree to make principal and interest payments if an issuer can’t, allowing the debt to get the highest rankings.

Ambac, the second-biggest in the industry, guarantees $546 billion of securities. MBIA stands behind about $652 billion of municipal and structured finance bonds, while FGIC has insured $314 billion of debt, including $600 million of bonds for the New York Yankees, according to the companies’ Web sites.

My comment: Ambac (ABK) has $5.65 billion in capital and $546 billion in guarantees.
MBIA (MBI) has has $6.96 billion in capital and $652 billion in guarantees.

“Never Questioned”

MBIA, Ambac, FGIC and their competitors have paid claims on less than 0.01 percent of the total debt from all municipal bonds they’ve insured, company statements show.

“Investors in guaranteed debt have never questioned the AAA guarantee from monolines,” said Toby Nangle, who helps oversee $37 billion at Baring Asset Management in London and avoids debt guaranteed by monolines. Given the rise in the perception of risk, they “may start to wonder if the emperor has no clothes,” he said.

My comment: These companies collect enormous sums of money based on guarantees they cannot meet if anything serious goes wrong. In that regard the emperor indeed has no clothes. Buying insurance from these companies provides a false sense of security and is essentially a big waste of money.

Mike Shedlock / Mish
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