In concluding my six-part post early this year on the bond insurers, I quoted Herb Greenberg who said that, “The rating agencies are like the kid who has his thumb in the dike. They simply can’t take it out because if they do they’ll pull the whole system down with it.” Well, the last of two kids took his thumb out last Thursday, after the other did some two weeks ago.
According to Reuters, Moody's downgraded Ambac Assurance three notches to "Aa3," the fourth highest investment grade, and Ambac Financial three notches to "A3," the seventh highest investment grade, from "Aa3." Moody's similarly cut MBIA Insurance's rating by five notches to "A2," the sixth highest investment grade, and MBIA Inc.'s also by five notches to "Baa1," three steps above junk, from "Aa2." On June 5, Standard & Poor's (S&P) likewise downgraded Ambac and MBIA's insurer financial strength ratings to double-A from triple-A.
MBIA's rating cut was more severe than the market's earlier expectations. This developed as Moody's concerns grew that MBIA's losses from exposure to securities backed by residential mortgages could reach $5.9 billion in a worst-case scenario, or some $500 million higher than its previous estimates. On top of this, MBIA's capital fell short by $2.6 billion to deserve retaining its Aaa rating.
The implication of Moody's rating cut, according to MarketWatch is this:
...a lot of the securities MBIA has guaranteed will be cut by two notches, to A from Aaa. That could have a knock-on effect on investment banks and other financial institutions that bought guarantees from MBIA and may now have to write down the value of their holdings further.
Downgrading MBIA to A2 may rattle the money market again because lots of securities may now fall below a requirement that money-market funds hold securities with ratings in the top two categories, said Richard Larkin, director of research at Herbert J. Sims & Co.
With no more thumb plugging the leak, so to speak, will the financial dam break? I'm not in a position to tell either way, so that will remain a rhetorical question for now. As far as I know, a real dam breaks because of a severely weakened structure, not just due to one single crack or hole.
The Dow Jones Industrial Average ended last Friday below 12,000 for the first time in three months. For sure, there are many forces at work in any stock market that it is so hard to attribute stock price movements to any single development.
Last Friday, for instance, analysts pointed to escalating oil prices, the further decline of the dollar, blue-chip bleeding, Merrill Lynch's warning of investor capitulation of the regional banking sector, which was joined in by J.P. Morgan analysts with similar sounding predictions and, of course, Moody's downgrade of Ambac and MBIA (which caused MBIA's shares to fall 13% to $5.50. At this level, the stock has already lost more than 90% of its value in the past year).
Are these converging developments enough to weaken the structural integrity of our financial dam? No, it will take more than that, but the damage is cumulative.
2 comments:
There's one development that could destroy the entire financial dam's integrity - it's the collapse of a major counter-party. Lehman Brothers seems to have one foot in bankruptcy. That should concern everyone.
You are right, Rogue Economist. That's why I've had one post too many about Lehman Bros. They are the weakest link in the chain--for now. I am watching yet another one. But it seems too early for that.
Post a Comment