Although it’s being treated as old news by the market, maybe it shouldn’t be. We’re speaking of the persistent credit issues, which keep cropping up in a number of disturbing ways. This week’s most notable entry in the ongoing financial soap opera which began as last year’s subprime mortgage woes is more credit concerns with regard to the bond insurers, MBIA (NYSE: MBI) and Ambac (NYSE: ABK). This is the latest twitch in a secular credit spasm that has corrosively worked its way through the homebuilding industry’s freefall, the banks’ and financial institutions’ erosions, the retailers’ drop, and most recently, the consumers and their loss of fragile confidence. Is it over?
Commentator Doug Kass of TheStreet.com was particularly scathing in his remarks about Moody’s re-affirmation of the triple-A ratings of both MBIA and Ambac this week. Kass brilliantly detailed the ugly, ugly story of MBIA, which has seen 80 percent of the stock’s value hacked off in the market’s ongoing punishing reaction to the bond insurer’s brutal loses. Kass posted a chart which showed a $15 billion loss along with the insurer holding $5.7 billion in cash as compared to $15.7 billion in debt. They hold obligations on $670 billion in debt. The stock, which at one time in the last year traded at over $70 a share, now trades at around $14. Kass pointed out that in stark contrast, Pfizer (NYSE: PFE) was downgraded from its AAA rating despite its relatively healthy numbers. Kass saved his most denunciatory comments for Moody’s and its irresponsible behavior of re-affirming the triple-A rating. What gives?
Similarly, Ambac, MBIA’s rival if not twin, which once traded at over $96 a share, now trades at $11, with the holder of $524 billion in obligations perhaps even in worse shape than MBIA. Its market cap has been sliced off as if it were a haircut that went all the way down to its ankles.
Despite all the smooth assurances of MBIA CEO Jay Brown that the Company has raised $1.6 billion in equity and $1 billion in other surpluses, critics of the Moody’s decision (and Standard & Poor’s as well) point out that maintaining the rating is at best questionable, that the potential for serious problems remain. MBIA and Ambac hold collateralized debt obligations, or CDOs, on many subprime mortgage loans, and basically act as an insurer which will cover defaults by the policyholders. This is a far riskier business than the other main business of these firms, which is the municipal bond business.
Although many friendly financial projections come up with numbers well within the range of these two debt insurers to meet their obligations, should defaults continue, these projections ride on the sweet assumption that we won’t have another round of unforeseen problems or a huge chunk of loans going bad. This has been a benign assumption that has been wrong thus far throughout the entire subprime crisis, as one massive writedown followed another. Many large institutions have taken multiple, mega-writedowns. Are we done?
Even if this moderate or reasonable scenario plays out, with the projections that the two insurers can meet their obligations, Ambac was still putting together a shaky eight-bank consortium plus a possible Cerberus Capital cash infusion to meet these capital reserve levels. Given the outcry against the easy rating re-affirmation, Moody’s has apparently now pulled back and qualified its approval pending further review of Ambac’s capital situation. There’s nothing routine about this.
Add to this that mortgage rates rose yesterday from 6.04 to 6.24, as banks are keeping the spread to hoard cash instead of lending it, along with the comments by Fed Chairman Ben Bernanke that some small banks may fail (how small, you might ask?). Also, read the back page news that Thornburg Mortgage (NYSE: TMA), an early near-casualty in the subprime debacle, continues to writhe like a pithed frog on the dissection table, as it divulged a recent $300 million margin call for which it admitted it will have to sell off assets to meet. It just goes on.
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